In the finest tradition of stable door locksmiths, the Financial Services Authority is working out how to prevent the next banking bubble, which is probably due some time around 2050. Yesterday’s consultation document, by FSA standards a relatively modest 164 pages, spells out how it wants banks and building societies to ensure they have decent dollops of rainy-day liquidity on hand.

There is much lip service paid to contingency planning and stress-testing. There is to be greater emphasis on retail deposits rather than those pesky (and paralysed) wholesale funding markets. But the meat and potatoes of the report is in the requirement for deposit takers to hold much larger quantities of liquid assets – cash and government bonds.

To judge by the illustrations in the FSA document, banks will in future have to hold much more in government bonds than in the past. That will be music to Alistair Darling as he embarks on the greatest borrowing spree in history. Government will lend to banks and banks will lend to Government.

The timing of the report is a little unfortunate. The failure of British banks to lend is regarded as the single biggest current threat to the UK economy. Yet the FSA freely admits that its proposed reforms could seriously reduce the ability of banks to lend – to anyone apart from HMG of course.

Officials are right to be thinking about shaping future policy to prevent a repeat of the current catastrophe. We do not want to fall into a second hole. But could we first please extricate ourselves from this one?

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