Mervyn King’s hope to split taxpayer-backed narrow banks from their casino subsidiaries sounds neat in theory. The Bank of England governor envisages a return to a world that existed in the US before the repeal of Glass-Steagall, in which banks that performed classic retail and commercial banking functions and enjoyed retail deposit insurance and access to lender-of-last resort facilities, were restricted in their ability to conduct risky trading activities. In this idealised system, moral hazard was non-existent, as the casinos were left with no illusion that they would be allowed to go bankrupt if they ran into trouble.

Sadly, Glass-Steagall would have been precious little use in the current crisis. It was neither the case that systemic risks were concentrated solely within the casinos, nor that these gambling dens could, with equanimity, be allowed to fail. Think of Northern Rock and Halifax Bank of Scotland, neither of which had investment banking activities, let alone proprietary trading. Or look at US regulators’ biggest mistake, in thinking it was safe to let Lehman implode because it was a pure investment bank. That decision, consistent with the separation of church and state Mr King espouses, triggered the near-collapse of the financial system.