City holds its breath as Cable takes over at BIS

The City suffered a collective shiver of fear yesterday as Vincent Cable was installed as Business Secretary and given a key role in the new Government's plans for banking reform.

With calls to break up the banks and a plan for a unilaterally imposed levy in the Liberal Democrat manifesto, combined with Mr Cable's stated view that bankers' bonuses should be capped at £2,500, the City, and especially the banking industry, is on tenterhooks to see what happens next.

Yesterday the two parties agreed that "reform to the banking system is essential to avoid a repeat of Labour's financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs".

They plan a banking levy and pledged "to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk."

However, there was speculation that Mr Cable's priority at the Business, Innovation and Skills (BIS) department is to ensure that banks meet pledges to restart lending. Under consideration is a loan guarantee scheme and the use of net lending targets for the nationalised banks, including Lloyds and Royal Bank of Scotland.

The two parties also plan to establish an independent commission to look at separating retail and investment banking in a "sustainable way". The commission will be given one year to report. The Bank of England will be handed control of macro-prudential regulation and oversight of micro-prudential regulation – by the Financial Services Authority.

The City's reaction to the plans was muted – it would not pay the financial centre's representative bodies to start publicly spoiling for a fight with a new administration barely a day old.

Angel Knight, chief executive of the British Bankers' Association, said: "It was to be expected that Vincent would get an economic portfolio in any hung parliament. We welcome him and look forward to him getting more involved with the industry. At the moment the plans outlined are high level and we don't have any of the detail. There will be a Banking Commission and a cross-Government policy committee. What is vital as we look at reforms is that it is not forgotten that this is a huge international banking centre. We have 60 nationalities alone at the BBA."

Rob McIvor, spokesman at the investment banking group Afme, said: "We share Dr Cable's objective of a robust and competitive financial system, even if we may not necessarily agree with all of his suggestions on how to achieve it. We look forward to constructive dialogue with the new Government as it develops its proposals."

But privately there are many who agree with David Buik, partner with BGC Partners. He said yesterday: "Vince Cable is a fully paid up member of the human race, communicative and kind. But if we adopt his plans for bank regulation. I suggest we send for two men in white coats. The Business Secretary must never forget that the financial sector has been a major contributor to the UK economy for 25 years. I appeal to him not to go and hand it on a platter to China, Switzerland or any other centre."