Leading article: Extortionate fees and empty threats

The great revolt against unfair overdraft fees charged by banks has lost some of its momentum since last summer. But it has certainly not ended. The terrain for the battle has merely shifted. The Office of Fair Trading brought a test case in the High Court yesterday against seven major retail banks and the Nationwide Building Society that should decide, once and for all, whether the charges that financial institutions have been levying on customers who stray over their agreed overdraft limits are legal or not.

This newspaper has long argued that these charges are indeed illegal, on the grounds that they bear no relation to what it costs the banks to deal with such overruns. Put simply, it does not cost a bank £30 to bounce a cheque.

But the banks will not give up without a fight. High overdraft charges have been a nice little earner for them over the years. The OFT estimates that they bring in some £10m a day. And even if they lose in the High Court, the banks are threatening to recoup the money in other ways. Some senior banking industry figures have spoken of a possible end to "free banking" in the UK and the introduction of monthly current account fees if they are denied the right to impose these charges.

We should not be intimidated by such threats. For one thing, despite the recent dislocation in the credit markets, banks are still extremely profitable organisations. There is no serious prospect of their going to the wall if they are not allowed to levy these excessive penalties from customers.

For another, the banks are hardly in a position to dictate terms at the moment. One of the salutary effects of the credit crunch (a consequence of improvident lending by the banks themselves) has been to expose the extent to which the sector is underwritten by the state. We now know that when there is a threat of a bank going under, as in the case of Northern Rock, the Government has no choice but to step in with public funds to stop panic spreading through the entire system. Since banks are effectively underwritten by taxpayers, via the Bank of England as lender of last resort, there is no reason why the state should roll over in response to demands from their managers and shareholders for enormous guaranteed profits.

Of course, it would be foolish to heap regulation on the banks for the sake of it. That would merely damage Britain's financial services industry, which provides many jobs and attracts valuable business and investment from overseas. But we should certainly not be scared of confronting the banks when they engage in profiteering, as is the case with these extortionate overdraft charges.