Has Osborne gone soft on the banks already?

The Chancellor talks tough on the need to take on the banks, but the City has been pleasantly surprised, says James Moore

George Osborne outflanked Alistair Darling over banks during the election campaign. Here was a Tory with hard words for the party's traditional friends in high finance, who even pledged that Britain would go it alone with a banking levy while at the same time dropping hints about plans for a break-up.

This tough-talking was in stark contrast to his opponent's words about, well, not really doing much other than some vague talk about forcing banks to hold more capital and some form of international agreement on new taxes, which is pretty much where we are now. A commission has been set up to report on splitting investment banks from retail banks, but the industry's lobbyists are already hard at work on that one.

Mr Osborne has been careful to ensure he retains the whip hand on banking reform. Most of the more radical proposals favoured by Business Secretary Vince Cable are likely to be watered down, if not dropped, despite the Chancellor's honeyed words about co-operating with his friend in the Department for Business, Innovation and Skills.

The latest evidence, say Mr Osborne's critics, comes from the G20 communiqué published over the weekend, which has given banks much more leeway over how long they have to get more capital behind their balance sheets – an option favoured by the UK.

The communiqué stated that new standards will be "phased in over a time-frame that is consistent with sustained recovery and limits market disruption, with the aim of implementation by end-2012, and a transition horizon informed by the macroeconomic impact assessment of the Financial Stability Board (FSB) and BCBS." Phase-in arrangements will "reflect different national starting points and circumstances".

This has been combined with a banking levy that fell some way short of expectations. Charged against banks' liabilities, it took less than a day for City analysts to estimate the cost to the biggest banks in Britain at less than £1.3bn. And they pointed out that by judiciously shifting the location of its trades, HSBC could avoid most of it while Lloyds will make more than £100m a year in extra profits because cuts to corporation tax will more than offset the impact of the levy.

Analyst upgrades to the banking sector have come thick and fast. Nomura became the latest, yesterday saying British banks have "turned the corner" and that "UK banking has proved a profitable industry and could be expected to be so again, as long as economic recovery continues, even if future returns are well below those achieved in the past cycle". Nomura's view on the sector is "bullish".

On the G20, the British Bankers Association said: "The choice is between measured, managed change which will affect fundamentally the economics of banking across the world, or knee-jerk responses to the financial crisis. Those seeking simple vengeance against the banks are likely to have been disappointed. But those wanting a fundamental recasting of the rules of the game, and a restructuring of the financial sector to reduce the risks in the global economy, have cause to be satisfied that consensus has been reached on the right course of action."

Others see it differently. TUC general secretary Brendan Barber said: "The banks seem to be starring in their own remake of The Great Escape. They came very close to causing the total meltdown of the global economy and have left us with recession, unemployment and fiscal crisis. Yet it is already back to business – and bonuses – as usual. Tough regulatory reform recedes into the distance. While BP is having to pay for the damage it has caused, the banks are escaping their responsibility for clearing up their mess. No wonder they cheered a Budget that let them off the hook with a levy less than Alistair Darling's bonus tax and which can be paid largely by the corporation tax cut."

Gavin Hayes, general secretary of Compass, the left-of-centre think-tank, said: "I think on a whole range of measures we can see that things are quickly going back to business as usual. We can see that in terms of the persistent bonus culture, which is still going on largely unchallenged, the goalposts being moved on capital ratios at the G20, whilst here in the UK the bank levy will raise far less than the one-off windfall levy on bankers' bonuses imposed by the previous Labour government and will do very little, if anything, to change the culture of excessive bonuses which fuel excessive risk-taking." Mr Hayes has also pointed out that Goldman Sachs remains on the list of government advisors, despite pledges by both of the coalition's members to strike it off, following the fraud charges filed by the US Securities and Exchange Commission.

A credit adjudicator – to give small businesses a chance of appeal if their lending applications were rejected – was quietly shelved in the small-print of the emergency Budget. The ferocious bark of opposition lacks bite.

What he said

* "There are those who have argued that we should wait until every country in the G20 introduces a bank levy. I believe that is not reasonable or fair. This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society. So it is fair and right that in future, banks should make a more appropriate contribution." Budget, 22 June.

* "Let's end the big cash bonuses. If there's spare cash at the bank it should be lent out to small businesses, medium businesses, to help people keep their job." Speech to the City of London, 26 October 2009.

* "None of these difficult questions are properly addressed today – every single one is basically left to the next government to deal with. It means we have more of a White Flag than a White Paper." On the previous government's banking reform plans, 8 July 2009.

* "Some banks are now making big profits again from higher margins, underpinned by taxpayer guarantees. The banks should be using their profits to rebuild their balance sheets, not to hand out huge bonuses while the rest of the economy picks up the pieces..." ABI conference, 8 June 2009.