Efforts to introduce reforms to the global financial sector could be put at risk by emerging signs of recovery in the economy, Lord Mandelson believes. In a speech to the British Bankers Association (BBA) today, the Business Secretary will give warning that good economic news could become a problem in maintaining a sense of urgency in the need for reform.

Bank restructurings, the return of bonuses and economic growth will weaken the pressure for reform, he will say. “Everyone’s a reformed drinker at the height of the hangover. The real test of commitment is when the headache clears.”

Lord Mandelson’s warning about the risk of complacency emerges as a leading banking industry survey reports the first signs of recovery in the financial sector.

Banks remain under intense pressure, but, according to a CBI survey of the financial sector, nearly a third — 29 per cent — of financial institutions expect a rise in business in the new quarter beginning this week, with 18 per cent anticipating further decline. The positive net balance of 11 per cent leaves the CBI’s gauge of financial sector sentiment at its most upbeat since March 2007.

In a wide-ranging speech to the BBA, Lord Mandelson will warn the City that it faces the risk of a “knee-jerk political response” from Brussels in the form of new regulatory supervision unless British institutions build alliances with financial sectors in other European Union member states.

The Business Secretary will also wade into the argument between the Bank of England and the Government over which institution should take precedence in regulating the banking sector.

Lord Mandelson says that he does not support a “twin peaks system”, which would split the regulation of banking between the Bank of England and the Financial Services Authority (FSA). The City needs a stronger regulator, not a weaker one: “We need to keep prudential and conduct of business expertise in one place . . . That regulator has to be the FSA.”

His comments will be seen as a rebuke to Meryvn King, the Governor of the Bank of England, who this month clashed over regulatory powers with Alistair Darling. The Governor called for greater powers for the Bank of England to intervene in the financial sector and urged the dismemberment of banks that were “too big to fail”.

The Business Secretary will say that the Chancellor was right: “Alistair Darling said last week that the banking revolution needs to start in the boardroom and he got some criticism for the apparent lack of radicalism in that suggestion. But he is absolutely right, and it only lacks radicalism if the people in those boardrooms are not radical.”

He will say that the Government will defend Britain’s interest in Brussels, where the European Commission has called for new institutions that would exercise supervisory powers over the City of London. “We have more skin in this game than the rest of Europe put together. We expect this to be recognised and, while we will be working for stronger European rules, I want to make it clear that we will also be defending the UK’s interests.”

Lord Mandelson’s warning about the need to pursue radical reform was echoed in Basle at weekend talks among central bankers. In its annual report, the Bank for International Settlements (BIS), regarded as the “central bankers’ central bank”, which is co-ordinating debate over a long-term shake-up of the financial system, highlighted “the risk that officials will fail to finish their repair task”.

“Even in the face of what might appear to be the first signs of recovery in the real economy, officials must persevere until the job is done,” the BIS argued.

Bailouts of troubled banks had reduced pressures to clean up their finances, while forced mergers between banking groups had created even more complex, unwieldy institutions that were hard to manage or police, the BIS warned. It urged governments to move faster to overhaul the financial system since delay would jeopardise efforts to restore sustained economic growth.

“Ultimately, the reluctance of officials to quickly clean up the banks . . . may well delay recovery,” it said. “To speed economic recovery, authorities must act quickly and decisively in their efforts to repair the financial system, and must persevere until the job in done.”

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