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The cost of Britain's controversial new aircraft carriers is set to rise by at least 拢1bn, and perhaps almost 拢2bn, as a result of the government's decision taken last October to make them compatible with different aircraft than those originally envisaged.

One defence industry veteran said the final bill was bound to be nearer 拢10bn, though a government official insisted that was way over the top.

The Ministry of Defence and the Treasury believe that total final costs could be nearer 拢6bn, if only one of the carriers is reconfigured to take the preferred version of America's Joint Strike Fighter aircraft.

An MoD official said no final decision had been taken on whether the first carrier to be built, the Queen Elizabeth, or the second carrier, the Prince of Wales, or both would be reconfigured.

He said it would probably be the case that changing the design specification for the Prince of Wales would be the cheapest option. But if that happened, it is not clear when - if ever - the Queen Elizabeth, due to enter service in 2019, would actually be able to accommodate jets (as opposed to helicopters).

Whatever happens, the increase in the bill will be substantial - and is only regarded by the Treasury as affordable because the increment is likely to be incurred later than 2014/15, when the expenditure constraints put in place by the Chancellor's spending review come to an end.

The Treasury is adamant that the MoD will receive no leeway to increase spending before then.

An MoD spokesman sent me the following statement late last night:

"The conversion of the Queen Elizabeth Class...will allow us to operate the carrier variant of the Joint Strike Fighter that carries a greater payload, has a longer range and is cheaper to purchase. This will give our new carriers, which will be in service for 50 years, greater capability and interoperability with our allies. Final costs are yet to be agreed and detailed work is ongoing. We expect to take firm decisions in late 2012."

The disclosure of the rise in costs is bound to reopen the debate about whether the UK really needs new carriers, especially since the UK will be without any aircraft carrier till 2019, following the decision to decommission Ark Royal.

The latest increase in likely expenditure on the enormous carriers - which are almost the size of three football pitches - stems from the decision of the Ministry of Defence in October to change the design one or both of them so that they can be used by the carrier version of America's Joint Strike Fighter.

This would mean they have to be fitted with catapults and traps - or "cats and traps" - rather than ramps.

The likely final cost will depend on whether the cats and traps are cheaper traditional steam devices, or newer-technology electromagnetic ones - and also whether the cats and traps are fitted to both carriers or just one.

Industry and government sources tell me that even if the MoD goes for the cheaper option, and even if the cats and traps are fitted to only one carrier, the additional bill will still be of the order of 拢1bn.

The hope however would be that in the longer term savings could be achieved because the maintenance costs of the more conventional Joint Strike Fighter should be lower.

One of the reasons the refit could be relatively more expensive is that for one of the carriers, HMS Queen Elizabeth, there would have to be a retrofit - because so much work has already been done on it.

"Retrofitting is always very pricey" said a senior defence executive.

The carrier project has been beset by controversy and cost increases.

In June 2009, I disclosed that the carrier costs had soared by more than 拢1bn as a result of a decision taken by the previous government to delay their entry into service.

Then last October the government, in its Strategic Defence and Security Review, came close to cancelling one or both carriers.

In the end, it committed to build both, but with the strange caveat that it might end up using only one of them. This was the reason given by the Prime Minister David Cameron in the Commons for building both:

"They [the previous government] signed contracts so we were left in a situation where even cancelling the second carrier would actually cost more than to build it; I have this in written confirmation from BAE Systems".

However in a memo to the House of Commons Public Accounts Committee (PAC), the Ministry of Defence estimated that cancelling both contracts would have saved 拢2bn and cancelling just one would have saved 拢1bn.

The MoD told MPs that "as the cancellation costs would have had immediate effect, the costs in the short term would have been significantly higher than proceeding with both carriers as planned; nearly 拢1bn more in financial year 2011/12 if both carriers had been cancelled".

The MoD was also concerned that cancelling the carriers would have undermined British capability and know-how in the manufacture of complex warships.

The carriers, called Queen Elizabeth Class Aircraft Carriers, are being built by the Aircraft Carrier Alliance, whose members are the UK defence giant BAE systems, the British engineering group Babcock, and Thales of France. The Ministry of Defence is also described as both a member of the Alliance and a customer.

Update 15:06:It has been pointed out to me, by what you might term a grizzled sea dog, that the UK does still possess two ships that can take aircraft. They are HMS Illustrious and HMS Ocean (which is a commando carrier with a flat top).

However they can't accommodate jet airplanes, only helicopters - so for veteran sailor it was a terrible error for the government to scrap the illustrious Harrier jumpjet.

He also takes the view, which I've heard from many other military personnel, that it would be bonkers to convert only one of the new carriers to take the carrier version of the Joint Strike Fighter - because if that were to happen, one of the carriers would be an enormous white elephant, and the other would not be able to provide a service for 100% of the time (it would need periodic servicing).

That said, the cost of retro-fitting the first carrier being built now and also redesigning the other one would certainly be nudging 拢2bn, maybe more.

He believes there is powerful strategic logic to building two new huge ships able to handle jets.

The problem for David Cameron is that he may find it hard to make the strategic case, since last autumn he justified building the two on the basis that it would not save any money to cancel one - which is not the most positive case for what turns out to be a very substantial public investment that anyone has ever advanced.

A clutch of big company results today illustrate the big economic trends in the UK and the world - and also say something about what the UK economy needs if its insipid recovery is to become something a bit stronger.

First the good news.

If we had a few more ARMs in this country, we would be agonising less about the imperative of "rebalancing" the structure of our wealth-creation away from financial services and the City.

That said, we'd need an incredible number of ARMs to make a dent in the high unemployment figures, because ARM simply licences its technology to the likes of Apple and LG, which put the chips into their devices. Or to put it another way, ARM's success is in exploiting the grey matter of a few boffins: it manufactures nothing.

Now part of the drag on Britain's recovery is the burden of debt on households and the impact of rising commodity prices on consumers' spending power.

You can see some of that in the first half figures of Associated British Foods, which points out that world sugar prices are at a 30-year high and that there has been a sugar shortage in Europe. ABF's sugar, grocery and agriculture profits were up substantially (sugar by 27%).

ABF's Primark chain of shops, whose prices tend to be the lowest on the high street, seems to have benefited from shoppers desire to trade down and economise, since underlying or like-for-like sales rose 3%. But although that looks okay compared with competitors, it was half the rate of last year's increase.

A further manifestation of all that borrowing in the euphoric years, before the bubble burst in 2007-8, is another set of uninspiring financial results from Heathrow and Stansted airports, and their holding company, BAA (SP) limited.

The losses of the two London airports increased 8% to 拢211.5m and net debt in BAA (SP) was flat at a substantial 拢9.9bn. Net debt at the next corporate level up, BAA (SH) plc was a chunky 拢10.4bn, against a regulated asset base of 拢13bn (which moved in the right direction by 2.7%).

BAA was acquired by the Spanish group Ferrovial and partners at the height of the debt-fuelled buyout boom of 2006 - and although BAA would argue that operational performance has improved, there is a question about when if ever the owners will ever see a return on their enormous investment.

The fundamental BP story is that the risks and costs of extracting energy are on a secular rising trend - for which we all pay a price.

Last but never least is Barclays and its figures for the first quarter of 2011 - which show top line income lower than the first quarter of last year and below the last quarter of last year. As for profits, they were up a bit or down a bit, depending on what view you take of whether changes in the notional value of Barclays' own borrowings should be included.

The unambiguous trend is a sharp reduction in the charge of debts and investments going bad - which was 39% lower compared with a year ago and 33% down on a three-month comparison.

As for lending, loans to retail customers rose by just under 拢1bn to 拢229bn since the end of 2010 - which is neither here nor there for a bank of Barclays' size. And the overall value of Barclays' loans and investments, on a risk-weighted basis, fell 1.5% over 12 months to 拢392bn.

For Barclays and other big western banks, it's no longer about growing their balance sheets, about lending more and more. Their long term recovery requires deleveraging, shrinking, which is the corollary of the perceived need for western consumers and governments to pay down their respective debts.

Here's the painful part: we may need banks to become smaller, but we all suffer if in the process they starve job-creating businesses of vital finance.

Those who fear the worst won't be reassured by figures just released by the British Bankers Association (BBA), which show that net lending to non-financial businesses by banks fell 拢3.2bn in March.

The BBA blames weak demand from companies. And although Barclays and the other banks have promised the Treasury, in their Project Merlin agreement, that they will meet the credit needs of the economy, my electronic postbag indicates that there remains quite a gap between their perception of deserving borrowers and yours.

Update 11:15: As some of you have pointed out, ARM saw its profits increase to 拢51m not 拢51bn, as I originally said, whilst losses at the two London airports increased to 拢211.5m, not 拢211.5bn. Sorry for my brainstorm. I've probably been dealing in billions a little too often recently - due to the magnitude of our recent financial crisis.

My colleague Tanya Beckett has conducted a rare and fascinating interview with Viktor Vekselberg, one of the billionaire oligarchs who co-own TNK-BP with BP - and who have fallen out with BP over BP's desire to form a business relationship with Rosneft, Russia's largest energy group, which would involve BP and Rosneft taking stakes in each other.

Because of the tensions that have arisen with AAR, the group that represents the oligarchs, BP in collaboration with Rosneft would dearly love to buy AAR's half share in TNK-BP. But their offer of $27bn for 50% of TNK-BP, which values the whole of TNK-BP at $54bn, was rejected earlier this month.

All may not be lost for BP, however. Mr Vekselberg suggests that a sale is possible. He tells Tanya Beckett:

"Of course it can be happen, for sure. If it will be [an] interesting proposal for us according to our understanding of (the) valuation of this company, of course we can accept. So far we have not received this."

So what would be an "interesting" valuation of TNK-BP? Well those close to the oligarchs say that they value TNK-BP at more than $70bn.

It's not clear BP and Rosneft are prepared to pay as much that. The difficulty for BP is that if it fails to reach an accommodation with Mr Vekselberg and his colleagues on price, then it will be stuck in a difficult place - because BP will have been publicly humiliated by the failure to consummate the Rosneft deal and will somehow have to rebuild relations with AAR in order to continue to extract billions of dollars in dividends from TNK-BP.

BP's partnership with AAR is in tatters, as Mr Vekselberg makes clear, in emotive terms, because of AAR's conviction, upheld in arbitration proceedings, that BP's proposed deal with Rosneft breached its contract with AAR:

"The picture is really simple. TNK-BP was created eight years ago, 2003. It was created like [a] joint venture between Russian shareholders and BP, huge global player... The company grew very active; it's now one of the best companies - not just Russian but internationally, because we have investment outside Russia...
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And really I personally was surprised, I was surprised why BP decided to do something which [was] not according to our shareholders agreement. I am not surprised why BP would like to do this but I am surprised why they did it without any consulting or even just like, just inform us about that (sic). I was very upset, I am still upset even now".

Mr Vekselberg says he is "not so interested in money". The billionaire
adds: "I have enough money, for my life, for my family, for all that".
But "we are businessmen, we are not ideological or something", so of course a sale to BP and Rosneft "can happen".

So what would occur if BP and Rosneft were to make him several billion dollars richer? "I am already very upset" he says "but I will [be] double upset if I have to decide to sell. It's because I dedicated for this company almost like 15 years".

These remarks by Mr Vekselberg are a sign that the impasse over the purchase by BP and Rosneft of AAR's stake in TNK-BP can be overcome.
It offers hope to BP, perhaps for the first time, that it may be able to buy AAR out of the joint venture by the time of the May 16 extended deadline set by Rosneft.

But here's the question? Is the price that Mr Vekselberg and his fellow billionaires will accept one that BP's owners will see as acceptable?

Some of them are already dubious about the terms of the new partnership it wants to form with Rosneft. At a time when BP remains financially stretched by the costs of the disaster in the Gulf of Mexico, BP's shareholders won't want it to further enrich Mr Vekselberg more than is strictly necessary.

For more on the Vekselberg interview, see Russia Business Report.

You might have noticed that my mind (and body) have been away from the day job. But I am so gobsmacked by the comprehensive defeat of the banks in the PPI case that my fingers felt compelled to tap on smartphone keys.

What probably matters most is that the judge has ruled against the banks on all important issues.

And two really mattered: first that the Financial Services Authority's principles governing the behaviour of financial firms are a proper basis for compensation awards; and that FSA rules based on those principles are necessary but not sufficient for judging whether financial firms engaged in mis-selling.

Frankly if the banks had succeeded in proving otherwise, it would have been utterly disastrous for the whole system of consumer protection in the UK, both the existing system and the new one being erected by the government.

As it turns out, it is the implications of today's ruling for the banks that are serious.

Unless they appeal (and I will come back to that question) they face having to make compensation payments of around 拢4bn to around two and a half million people (around a quarter of all PPI policies were allegedly mis-sold).

The damage is greatest for the two banks in which we as taxpayers have big stakes, Lloyds and Royal Bank of Scotland (which is just dandy for all of us) - largely because they have the largest shares of the retail banking market.

Lloyds faces the biggest bill: both it and RBS look as though they will have to pay compensation in excess of 拢1bn each.

That Lloyds and RBS appear to have done the most mis-selling in this instance will be seen by some as further evidence that their particularly powerful positions in retail banking is bad for the welfare of consumers - it will be taken as strengthening the argument of the Independent Commission on Banking that reinforcing competition is a priority (see my recent posts Banking Commission wants firewall around retail banking and Banking Commission: Retail banking must be ring-fenced).

The tab for Barclays and HSBC will also be pretty steep - some hundreds of millions of pounds each.

Given that few lawyers in my acquaintance rated the banks' chances of winning the case terribly highly, it is slightly odd that they used the courts to minimise or delay making restitution - especially at a time when they are not exactly the most popular institutions in the UK.

It is even more curious that they have fought and fought to limit their liability in the light of the two main examples of mis-selling identified by the FSA.

First there were all those refusals to make payouts under the loan insurance plans to those who had a pre-existing medical condition - when it is clear that relevant customers had no idea that pre-existing medical conditions were grounds for non-payment.

Second, it is a logical absurdity that the policies should have been sold by the banks to the self-employed, given that is impossible for a self-employed person to be made redundant.

So what next? Well the banks could make those two and a half million victims of mis-selling wait another couple of years to be made whole by appealing to the Supreme Court.

Or they could take the view that the prospects of winning in any court are too slim to outweigh the potential for further damage to their respective public images from being seen to defy an unambiguous legal judgement that they let down millions of their customers.

Unless of course they regard their reputations as so impaired that there's nothing left to lose from prevarication.

The Western world remains where it has been for some time, delicately poised between anaemic recovery and a shock that could tip us back into economic contraction.

Perhaps the most conspicuous manifestation of the instability is that investors can't make up their minds whether the greater risk comes from surging inflation that stems largely from China's irrepressible growth or the deflationary impact of the unsustainable burden of debt on peripheral and not-so-peripheral eurozone (and other) economies.

And whence do investors flee when it all looks scary and uncertain, especially when there's a heightened probability of specie debasement - to gold, of course.

Unsurprisingly, with the German finance minister, Wolfgang Schauble, implying that a writedown of Greece's sovereign obligations is an option, and with consumer inflation in China hitting 5.4% in March, there has been a flight to the putative safety of precious metal: the gold price hit a new record of $1,480.50 per ounce for June delivery yesterday and could well break through $1,500 within days (say the analysts). Silver is hitting 30-year highs.

In a way, if a sovereign borrower were to turn 鈧�100bn of debts (for example) into an obligation to repay 70bn euros, that would be a form of inflation - it has the same economic impact, a degradation of value, for the lender. But it is a localised inflation; only the specific creditors suffer directly (though there may be all sorts of spillover damage for others).

And only this morning there was another blow to the perceived value of a chunk of euro-denominated sovereign obligations. Moody's has downgraded Irish government debt to one level above junk - which is the equivalent of a bookmaker lengthening the odds the on that country's ability to avoid controlled or uncontrolled default.

Some would say that the Irish government has made a start in writing down debt, with the disclosure by the Irish finance minister Michael Noonan yesterday that he would want to impose up to 6bn euros of losses on holders of so-called subordinated loans to Irish banks.

But I suppose the big story in the eurozone, following the decision by the European Central Bank to raise interest rates, is that the region's excessive government and bank debts are more likely to be cut down to manageable size by a restructuring - writedowns of the amount owed - than by generalised inflation that erodes the real value of the principal.

The decision of the ECB to raise rates has to be seen as a policy decision that - in a worst case - a sovereign default by an Ireland, or Greece or Portugal would be less harmful than endemic inflation.

But is that right? How much damage would be wreaked if Greece or Ireland or Portugal attempted to reduce the nominal amount they owe to levels they felt they could afford?

Let's push to one side the reputational and economic costs to those countries - which are quite big things to ignore, by the way - and simply look at the damage to external creditors from a debt write down.

And I am also going to ignore the difference between a planned, consensual reduction in sums owed - a restructuring that takes place with the blessing of the rest of the eurozone and the International Monetary Fund - and a unilateral declaration of de facto bankruptcy by a Greece, Ireland or Portugal (although the shock value of the latter could have much graver consequences for the health of the financial system).

So the first question is how much of the impaired debt is held by institutions and investors that could not afford to take the losses.

Now I hope it isn't naive to assume that pension funds, insurance companies, hedge funds and central banks that hold Greek, or Irish or Portuguese debt can cope with losses generated by a debt restructuring.

The reason for mild optimism in that sense is that those who finance investments made by pension funds and insurers - that's you and me by the way - can't get their money out quickly or easily. We simply have to grin and bear the losses to the value of our savings, when the stewards of our savings make lousy investment decisions.

As for hedge funds, when they make bad bets, they can suffer devastating withdrawals of finance by their investors, as and when the returns generated swing from positive to negative. But so long as those hedge funds haven't borrowed too much, so long as they are not too leveraged - and most aren't these days - the impact on the financial system shouldn't be significant.

Finally, if the European Central Bank - for example - ends up incurring big losses on its substantial holdings of Greek, Portuguese and Irish debt, it can always be recapitalised by solvent eurozone nations, notably by Germany and France.

However this is to ignore the node of fragility in the financial system, the faultline - which is the banking industry.

In the financial system's network of interconnecting assets and liabilities, it is the banks as a cluster that always have the potential to amplify the impact of debt writedowns, in a way that can wreak wider havoc.

That's built into their main function, as maturity transformers. Since banks' creditors can always demand their money back at whim, but banks can't retrieve their loans from their creditors (homeowners, businesses, governments), bank losses above the norm can be painful both for banks and for the rest of us.

Any event that undermines confidence in the safety of money lent to banks, will - in a best case - make it more difficult for a bank to borrow and lend, and will, in the worst case, tip the bank into insolvency.

Which, of course, is what we saw on a global systemic scale from the summer of 2007 to the end of 2008. That's when creditors to banks became increasingly anxious about potential losses faced by banks from a great range of loans and investments, starting with US sub-prime.

So what we need to know is whether the banking system could afford losses generated by Greek, Irish and Portuguese defaults.

And to assess this, we need to know how much overseas banks have lent to the governments of these countries and also - probably - to the banks of these countries, in that recent painful experience has told us that bank liabilities become sovereign liabilities, when the going gets tough.

According to the latest published analysis by the Bank for International Settlements (the central bankers'central bank), the total exposure of overseas banks to the governments and banks of Greece, Portugal and Ireland is "just" $362.2bn, or 拢224bn,

Now let's make the heroic guess that a rational writedown of this debt to a sustainable level would see a third of it written off - which would generate $121bn (拢75bn) of losses for banks outside the countries concerned.

If those loans were spread relatively evenly between banks around the world, losses on that scale would be a headache, but nothing worse.

But this tainted cookie doesn't crumble quite like that. Just under a third of the relevant exposure to public sector and banks of the three debt-challenged states, some $118bn, sits on the balance sheets of German banks, according to the BIS.

For all the formidable strength of the German economy, the balance sheets of Germany's banks are by no means the strongest in the world. German banks would not be able to shrug off $39bn or 拢24bn of potential losses on Portuguese, Irish and Greek loans as a matter of little consequence.

This suggests that it is in the German national interest to help Portugal, Ireland and Greece avoid default.

If you are a Greek, Portuguese or Irish citizen this might bring on something of a wry smile - because you would probably be aware that the more punitive of the bailout terms imposed by the eurozone on these countries (or about to be imposed in Portugal's case) is the expression of a German desire to spank reckless borrowers.

But as I have mentioned here before, reckless lending can be the moral (or immoral) equivalent of reckless borrowing. And German banks were not models of Lutheran prudence in that regard.

If punitive bailout terms make it more likely that Ireland, Greece or Portugal will eventually default, you might wonder whether there has been an element of masochism in the German government's negotiating position.

Yes you read the headline correctly.

And, of course, if you think I look like a plonker, that's fair enough.

Here is what happened.

Glencore's announcement that it plans to list on the London and Hong Kong stock exchanges said this:

"Glencore has made its decision regarding the new chairman and is in the final stages of making the appointment, which will be communicated shortly".

I was told by impeccable sources that the chosen candidate was Lord Browne. And that is definitely the case.

However those "final stages of making the appointment" were not the formality that I and my sources believed.

When it came to the final talks between Lord Browne and Glencore, there was a disagreement about governance issues.

Anyway, Glencore came to the view that Browne wasn't quite right for it. My sense is that Lord Browne was more of a stickler for detail than this entrepreneurial company felt comfortable with.

So what on earth happens now?

Well Glencore can't float without a chairman.

Before Lord Browne became the preferred candidate, Simon Murray - the Hong Kong business leader - was the favourite to take the job.

Does he still want the job? Does Glencore want him?

I don't know, but I will endeavour to find out.

It's all a cracking corporate soap opera. But probably not the ideal curtain-raiser for the biggest flotation the London market has ever seen.

Update 15:15: Glencore has now appointed Simon Murray, former managing director of the Asian giant Hutchison Whampoa, as its chairman.

I understand former BP chief executive Lord Browne is to be chairman of Glencore.

Update 12:12: Lord Browne's appointment as chairman of Glencore - the commodities colossus which is about to float on the London Stock Exchange - represents one of the great rehabilitations of a corporate reputation in modern times.

In May 2007, he resigned as chief executive of BP, ending a 41 year career at the company (much of it glittering), after it emerged that he had lied to the courts about the circumstances of how he met his former lover, Jeff Chevalier.

At the time, some shareholders in BP were also questioning whether he had been quite as successful in integrating and managing the enormous oil businesses he had bought, Amoco and ARCO, as he had been in buying them.

These concerns came to the fore after an explosion at its Texas City refinery in 2005 that killed 15 workers.

But after a period of avoiding the spotlight, Lord Browne has in the past year become something of a public figure, first by writing a report for the government on the reform of university finance - which prompted the controversial decision to increase university fees to up to 拢9,000 a year - and then by advising the Prime Minister David Cameron on how to recruit business leaders to be non-executive directors of Whitehall Departments.

Update 12:26: Now one of the slightly odd things about the appointment of Lord Browne is that another battered former chief executive of BP, Tony Hayward, is already on the board of Glencore - as its senior non executive director.

You will remember that Tony Hayward quit the helm of BP only last autumn, after the explosion on the Deepwater Horizon rig that also caused fatalities and led to massive pollution of the Gulf of Mexico.

Now the role of the chairman and senior non-executive is to guard the interests of independent shareholders. So when Glencore floats on the London and Hong Kong exchanges in the next few weeks, new investors in the company will be looking to these two former BP lifers to protect them.

Update 13:10: I would imagine that investors will give a largely positive welcome to Lord Browne's appointment for two reasons.

First, they would see him as having a lot to prove - and therefore as having an incentive to work hard in their interests.

Second, he is famously tough. They would not see him as being vulnerable to being pushed around by the partners, who will continue to own around 80% of Glencore after the flotation.

In particular, Lord Browne would be viewed as having the backbone to stand up to Glencore's famously driven chief executive, Ivan Glasenberg.

And, for the avoidance of doubt, Lord Browne is taking on a proper job.

He will chair the world's largest supplier of commodities, which is based in Switzerland and whose profits after tax last year were $3.8bn.

Glencore confirmed only this morning that it will be listing on the London and Hong Kong stock exchanges at a value of somewhere between $60bn and $70bn - or around 拢40bn.

So as and when the flotation takes place, Glencore will become something like the 15th most valuable company in the FTSE100 list of the biggest companies quoted on the London market.

Glencore's statement this morning makes clear that it wants to use its newly listed shares as currency for expansion and takeovers. It is widely believed that it will move quickly after listing to secure a merger with the mining giant, Xstrata, in which it holds a 34% stake.

The flotation will confirm that Mr Glasenberg is a multi-billionaire, worth almost $10bn based on his shareholding in Glencore - and hundreds of his Glencore colleagues will become multi-millionaires.

Update 14:54: In an extraordinary development, Lord Browne is now not going to be chairman of Glencore. I will explain what happened in a new post.

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Everyone is reading the last rites over BP's attempt to swap shares with Russia's largest energy company, Rosneft.

But my sense is that the British oil giant will have one last go at trying to salvage something.

I expect that within the next few hours BP will make a formal request to Rosneft to extend the deadline of midnight tomorrow (UK time) for the deal to be done.

BP would like an extension of a couple of weeks or more - to give it the time to prepare its case for an independent tribunal in Stockholm on why the share swap with Rosneft should be permitted.

BP wants to deepen its business relationship with Rosneft by increasing its stake in Russia's biggest energy company from 1% to 10%, while Rosneft would take a 5% holding in BP.

It may seem odd that BP has not yet made the request to Rosneft for a deadline extension. But there was little point while it was continuing to negotiate with the objectors to the deal, the oligarchs behind AAR, which is the joint owner with BP of TNK-BP.

There is a strong possibility that BP's chairman, Carl-Henric Svanberg, will not be able to tell the company's shareholders where the deal stands at tomorrow's BP annual meeting, which starts at 11.30am.

Talks with AAR have now more-or-less collapsed.

In the latest attempt to placate AAR, BP offered to purchase its 50% holding in TNK-BP.

But a BP source said AAR put an impossibly high valuation on TNK-BP of around $70bn, which would value the oligarch's stake at more than $35bn.

BP was prepared, jointly with Rosneft, to something over $25bn for their stake, on the basis that TNK-BP is worth more than $50bn.

Another stumbling block was that AAR wanted payment to be in BP and Rosneft shares - and both companies decided that they did not want the AAR oligarchs to become substantial shareholders in their companies.

AAR sees it differently.

An executive close to the oligarchs pointed out that the proposed deal with Rosneft - which initially included an agreement to explore for oil in the Russian Arctic - was blocked by rulings given in the High Court in London and by the independent Stockholm tribunal, on the grounds that BP had violated its shareholder agreement with AAR.听

An AAR source said: "It is up to BP to make a sensible proposal to get out of the mess it has created. One has not been forthcoming."
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He added: "AAR's position has always been clear - AAR wanted the entire Rosneft deal turned over to TNK, not some selected parts...They now face the consequences of their actions."

AAR is now preparing legal action against BP, two BP appointees to the TNK-BP board and the BP chief executive, Bob Dudley, alleging that they damaged the interests of TNK-BP.

Interestingly however, Stan Polovets, CEO of AAR told me tonight that "AAR is a long-term strategic investor in TNK-BP and has no plans to exit."

UPDATE 06:06 BP hopes to have heard, before this morning's annual meeting, whether Rosneft will allow an extension of the share-swap deal.

UPDATE 07:28 Rosneft has extended the deadline for the share swap with BP by a month to 16 May.

For me the most interesting part of the is Annex three (right at the back of the book) on "cost-benefit analysis of financial stability reforms".

Among other things, this looks at the size of the subsidy taxpayers provide to big banks, through their (our) implicit promise to banks that they won't be allowed to fail.

And for the avoidance of doubt, this promise was real: at the height of the banking crisis at the turn of the year between 2008 and 2009, aggregate support in the UK for banks via loans, guarantees and investment provided and underwritten by taxpayers was around 拢1.2 trillion - and it is probably still a bit over 拢500bn.

Or to put it another way, British taxpayers did not allow any bank to fail. And any losses suffered by bank creditors were largely of a voluntary nature: they were incurred mainly when investors chose to sell their bank loans (often in the form of so-called subordinated debt) at less than par or 100p in the pound.

Here is the important point: if a lender to a bank believes that as and when a bank has difficulty repaying a debt, the taxpayer will step in and prevent default, that creditor is in effect lending to the state or government.

And, as you'll know, lending to a state or government is perceived to be one of the safest loans you could make.

The view that a loan to a bank is in fact a loan to HMG, intermediated as it were by the relevant bank, is particularly true of the biggest banks, such as Royal Bank of Scotland, HSBC and Barclays - because these banks are so important to the smooth functioning of the economy that they are deemed to be "too big to fail" (that's a phrase we've all learned to love - or not).

Which means that those mega banks - known in the jargon as systemically important financial institutions or SIFIs - are able to pay much lower interest rates when they borrow than they would have to do if there was no possibility of the state ever bailing them out.

To put it another way, if banks were perceived to be normal commercial entities, able to go bust like any other company, the cost for them of borrowing would be much higher.

In other words, taxpayers provide banks with an interest-rate subsidy - and the subsidy is disproportionately largest for the biggest banks.

That subsidy consists of the difference between the low interest rate banks actually pay to borrow and what they would have to pay if they were "stand-alone" entities that benefited from no external insurance against bankruptcy provided for free by taxpayers.

As you will recall from earlier posts, Andy Haldane of the Bank of England calculates this subsidy to have been worth around 拢100bn in 2009 for the giant banks alone - and 拢57bn per year on average over 2007-9 for all British banks.

So not a trivial subsidy. If he's right, the subsidy is significantly bigger than the annual global profits of all our big banks combined.

Unsurprisingly the banks think he has overstated the subsidy. They commissioned the .

Oxera estimated the annual value of the taxpayer guarantee at a much smaller 拢6bn per year. Which most of us would still see as a fair old pile of wonga - but more of a Mount Snowden of cash than an Everest.

Who's right, Oxera or the Bank of England?

Interestingly, the Independent Commission on Banking finds more fault with the assumptions built into Oxera's analysis than with those employed by Haldane.

In particular Oxera seems to make the error which so many banks themselves made in their own risk-control models in the run-up to the crisis of 2007-8 - which is to put too low a probability on the occurrence of extreme events (such as banking crashes).

And, says the commission, Oxera also places no value on the very real possibility of a bank receiving state support because of problems purely of its own making, rather than problems generated by a systemic crisis.

Making these adjustments means that the Oxera model would calculate the subsidy as being worth not far off 拢30bn a year, according to an economist much brainier than me.

Which would be equivalent to more than the combined statutory profits of all our big banks.

However, the commission itself isn't so precise. It says that the public guarantee for banks reduces bank funding costs "by considerably more than 拢10bn a year".

Now, "considerably more than 拢10bn a year" is a very substantial sum, in anyone's money.

So is it a useful subsidy?

If the banks deployed it to provide socially useful loans - mortgages for key workers, credit for entrepreneurs providing employment in the poorest parts of the country - most of you would probably say hooray.

If however the subsidy was pocketed by investment bankers in the form of enormous bonuses, you would probably say boo hiss.

Right now, of course, bankers' bonuses are rather more visible than banks' socially useful lending and investment.

But that's not the main argument against the subsidy.

The two strongest reasons for trying to eliminate the subsidy are:

1) that the subsidy is biggest for the biggest banks (for reasons explained above), which stifles competition and is therefore very bad for consumers (us) - since it puts smaller banks at a substantial commercial disadvantage; and

2) that if banks are able to borrow copious amounts at a rate that does not capture the proper commercial risks they take, they will tend to lend at a rate and in amounts that also do not properly capture the risks of what they do.

That second concern may well be the more important - in that we are not exactly short of evidence of banks going on a reckless lending and investing spree in the years leading up to the great crash of two and a half years ago.

And it was this lending and investing spree, the credit bubble, that was one of the more important causes of the crash that in turn sparked the worst recession since the 1930s.

So to put it another way, it would be a good thing if the taxpayer subsidy were eliminated - because banks and bankers that know they are not going to be bailed out by taxpayers are much less likely to behave in the kind of gung-ho way which could end up forcing taxpayers to bail them out (if you see what I mean).

In fact if we don't eliminate the subsidy, if we don't convert the banks like RBS and Barclays that are too big to fail into banks that can fail without the need to be rescued by taxpayers, we may find that our banks have become so big and bloated that they are too big to save.

This is not some scary bedtime story. It happened only the other day, in Ireland and in Iceland.

In both those countries, the losses of the banks were too great for their respective governments to bear - which is why Ireland has been bailed out by the EU and IMF and is why the UK and the Netherlands felt obliged to underwrite the offshore deposits of Icelandic banks.

Which brings me to the conclusion that won't be seen as cheery by all.

It would probably be a very good thing if the banking commission were to succeed in its aim of reducing the taxpayer subsidy for big banks.

But we should not pretend that it is only the banks that will feel pain if the subsidy shrinks.

Were the commission to succeed, there would almost certainly be an increase in the price of credit for all of us and a reduction in the supply.

Plainly what matters therefore, as and when that happens, is that the loans and investments which fall by the wayside are the froth of little fundamental economic value - which should happen to an extent, but can't be certain.

The Independent Commission on Banking (ICB) set up by the Treasury has come up with reform proposals for the banking industry in the UK that will anger and worry both the banks and the banks' sternest critics.

The central recommendation of - which is arguably the most important response in the UK to date to the financial crisis of 2007-8 that triggered the worst recession since the 1930s - is that a protective firewall should be put around the British retail banking operations of big universal banks, such as HSBC, Barclays and Royal Bank of Scotland.

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Customers' deposits, business lending and the transmission of money would be ring-fenced within the universal banks as new subsidiaries, endowed with increased capital resources to protect against losses.

Also, the ICB wants Lloyds to be ordered to sell "assets and liabilities" in addition to those that the European Commission is already obliging Lloyds to sell, to reduce its substantial market share in personal banking. If implemented, this would force Lloyds to sell more branches on top of the 600 it is already auctioning.

The big banks will claim that putting their retail banks into subsidiaries would impose significant extra costs on them - because it would force them to raise and retain more capital (which is expensive), and it would increase what they pay to borrow. Their fear is that these incremental costs would put them at a disadvantage compared with their international competitors.

However the ICB says that the banks have exaggerated the size of this new financial burden. It calculates that the extra costs would be a good deal less than the 拢12bn to 拢15bn a year estimated by the consultants Oliver Wyman in a report prepared for the banks.

Perhaps more importantly, the commission is convinced that the social benefits of the reform - in respect of reducing the likelihood of destabilising financial shocks that increase unemployment and cut growth - would significantly outweigh the costs.

The commission has also taken steps to reassure the government that it doesn't have a great deal to fear from getting tough with the banks and implementing the change: on its analysis, even if big banks such as HSBC or Barclays were to move their respective head offices abroad in protest at the reforms, the loss of tax revenue and the damage to the success of the City of London would be limited.

The interim report says: "The commission's view is that the reforms of the kind contemplated...would support the competitiveness of the economy and would be likely to have a broadly neutral effect on financial services".

Perhaps because of that, some will claim that the commission has been too timid - in that it has rejected more radical alternatives, such as breaking up the banks, imposing formal limits on their size, prohibiting them from using depositors' cash to make loans, or massively narrowing the range of their permitted activities.

The thinking behind the ring-fencing recommendation is that if the wholesale or investment banking arm of a universal bank were to go bad, the retail operation - which looks after our savings, lends to business and moves money around - would not be tainted.

And if in the event it was the universal bank's retail banking side that ran into difficulties, rather than the wholesale or investment arm, then in theory it would be cheaper and easier for taxpayers to rescue the retail bank as a ring-fenced, separable subsidiary: there would be no need for taxpayers to bail out the entire giant universal bank, as British taxpayers were forced to do in 2008 in the case of Royal Bank of Scotland.

That said, the commission has not been prescriptive about precisely which of the banks' assets and liabilities would be defined as "retail" and then ring-fenced: it wants to encourage a debate to determine the categories of deposits and business lending that should be moved, along with the money transmission networks, behind the new firewall.

There are a number of other proposals:

1) The retail banking subsidiaries of the universal banks and any other large retail banks in the UK, such as Lloyds and Santander, would have to hold equity capital, to absorb potential losses, equivalent to 10% of their respective loans and investments - which is 3 percentage points greater than the new international minimum of the so-called Basel lll accord.

2) Wholesale banks operating in the UK would not have to hold more capital than the international norm (which is likely to rise this year, as regulators on the Basel Committee and the Financial Stability Board review how much capital banks should hold to cover the risks of their trading activities).

3) A universal bank would be able to move capital from its retail arm to its wholesale arm (and back again), so long as the separate subsidiaries never let their capital ratios fall below the new minimums. This, in theory, would preserve some of the benefits for a universal bank of being a universal bank.

4) The commission regrets that Lloyds was able to acquire a huge 30% market share in current accounts through the rescue takeover bid of HBOS at the end of 2008 - but it does not recommend that Lloyds should now be forced to divest HBOS.

5) To promote greater competition, Lloyds should be forced to dispose of a greater "package of assets and liabilities" than it is currently being required to do by the European Commission. Unlike the rest of the proposals in the interim report, this recommendation will require an almost immediate decision by the chancellor of the Exchequer - because Lloyds has already started to sell the 600 branches, current accounts and mortgage accounts it is obliged to offload, and it would be very difficult for it to sell another bit of its operations at a later date (see below for more on this).

6) The implicit charges and costs to customers of current accounts should be set out in a much clearer and more comprehensible way, and there should be a deadline of perhaps seven days imposed on banks for transferring over customer information when someone moves his or her current account to a new bank.

7) The new Financial Conduct Authority being created by the government to protect consumers of financial services should have "a clear primary duty to promote effective competition" - which will please MPs on the Treasury Select Committee, who have already called for this.

8) In the longer term, a new automated system for shifting a current account from one bank to another should be created. And it should perhaps be possible for current account customers to keep their account numbers when they move banks, in the way that mobile phone customers can keep their phone numbers when they change suppliers.

So where do we go from here?

There will now be an intense and passionate debate, between banks, politicians, regulators and assorted campaigners, about whether the commission has been too tough or too soft. The commission is scheduled to produce final recommendations in September - and the government will only then have to decide whether to implement those recommendations.

On paper, the commission has been less bold than the Lib Dem Business Secretary, Vince Cable, would have wanted when he was in opposition. It will be interesting and important to see whether Mr Cable's views on bank reform have been mellowed by his participation in government.

As for HSBC or Barclays, it is not clear that they would gain much by carrying out their sotto voce threats to move their respective HQs abroad - since this would not protect them from the requirement to increase the equity capital they hold in their British retail banking operations to 10% of assets.

And unless they were to move their new head offices to another part of the European Union (and I've discussed in earlier posts why emigration to Paris, Frankfurt or Luxembourg is unlikely), they probably couldn't dodge the requirement to put their UK retail operations into new subsidiaries (because British regulators have the power to insist on subsidiarisation for all banks except those from another part of the EU).

Now because Santander has its head office in Spain, it may be that it will be seen to have an unfair advantage over RBS, Barclays or HSBC. But I understand Santander already operates through a subsidiary in the UK as Santander UK (I will let you know if I am wrong about this).

Anyway, if George Osborne is persuaded by the commission's argument, he can probably implement its proposals with little risk that the banks can exact revenge on him by stomping out of the UK in a huff (of course some of you would probably quite like them to do that in any case).

On the other hand, Mr Osborne doesn't have to make up his mind for a while - except on one issue. If he thinks the commission is correct that, for the good of competition, Lloyds has to slim down more, then more-or-less straight away he has to order Lloyds to postpone the disposal of 600 branches.

The reason is that Lloyds - under its new chief executive Antonio Horta-Orsorio - has recently accelerated that sale, presumably because it spotted there was a risk that it would be ordered to do more. And Lloyds would find it difficult to sell a second lump of assets for a decent price so soon after the first.

If Lloyds and its shareholders - which include taxpayers with 43% - are to get the best possible price for selling a chunk of its business, far better for the sale to be in one big lump than two small ones.

In that context, you may be amused that the commission gave Lloyds advance notice a month ago of this one recommendation (but none of the others).

Interestingly, Lloyds did not feel it needed to tell its shareholders what the commission wanted - and nor has it manifested any conspicuous inclination to slow down the auction of the smaller lump of its business it was already obliged to sell.

Update 1100:

So will the banking commission's proposals split the coalition, pitting the Lib Dems - supposedly more radical on bank reform - against the Tories?

Probably not - because the commission seems to have framed its recommendations with more than half an eye on what each party said it wanted before the election.

Both Lib Dems and Tories can claim the commission is offering something similar to what they wanted.

Lib Dems can and probably will say that ring-fencing retail banking is close to splitting retail from investment banking.

As for Tories, they proposed a form of America's so-called Volcker rule. And the interim report says: "The Volcker rule shares a common motivation with the retail ring-fence in that it aims to curtail government guarantees."

In other words, the commissioner is presenting his retail ring-fence as a kind of Volcker rule for Britain.

PS - Lloyds tells me that the commission made what it saw as a flaky proposal to it a few weeks ago: to hive off some assets into a new nationalised bank.

Lloyds claims it was not given a workable recommendation to dispose of more assets and liabilities - which is why it decided not to tell its shareholders about the conversation with the commission.

The Independent Banking Commission will say that an internal firewall or protective barrier has to be put around the parts of a big or universal bank that are deemed to be vital to the interests of the economy (as I said on the Ten O'Clock News last night).

They are the parts of a universal bank such as Barclays, Royal Bank of Scotland and HSBC that would always be bailed out by taxpayers - and they include our savings, the mechanism for moving money around (what is known as the money transmission mechanism) and business lending operations.

The idea is to make sure that they could not be damaged as and when problems arise in other part of banks, such as the trading activities of banks.

However there are different ways of achieving this end - which would be more or less expensive for banks to implement.

Banks argue that the cheaper option would be to reinforce the operational separation of this kind of retail banking from their investment banks, with tighter legal separation into separate legal subsidiaries only occurring in a crisis, in a process called resolution.

In these circumstances there would be some increase in the costs of borrowing for banks - because it would be clear that taxpayers were no longer prepared to bail out everything they do in all circumstances, and therefore the risks of lending to banks would increase.

But because banks would retain the ability to deploy their capital across the range of their activities according to the returns they perceive to be available at any particular moment, the increase in their costs of doing business would not be - in their view - prohibitive.

The other option would be for the banks' investment banking and retail banking operations to be forced to operate in independently funded and independently capitalised subsidiaries in good times as well as bad.

The banks fear that this would force them to raise a lot more expensive capital for each of their new subsidiaries and would also lead to a far greater increase in their borrowing costs. They claim such a structural reform would put them at a disadvantage compared to their overseas competitors.

However this form of subsidiarisation is widely seen to be a far more robust way of reducing a substantial implicit taxpayer subsidy for investment banking - the parts of the bank that trade on financial markets and advise the biggest companies on how to raise money - and also of reducing the probability that taxpayers would be called on to bear the enormous financial liability of rescuing an entire universal bank that runs into difficulties.

My understanding is that the Commission will present the options and initiate a debate.

As for the Chancellor, George Osborne, he will welcome the analysis carried out by the Commission, but he will not throw his weight behind any particular proposal to reform the banks until after the Commission's final report is published in the autumn.

News International is to admit liability in a number of cases brought against it for alleged phone hacking by the News of the World, its Sunday newspaper.

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The UK arm of Rupert Murdoch's News International has put out a statement saying that it "has decided to approach some civil litigants with an unreserved apology and an admission of liability in cases meeting specific criteria".

It will also establish a compensation fund, with a view to "dealing with justifiable claims fairly and efficiently".

News International believes most claims will be settled for less than 拢100,000 each, rather than the settlement of several hundred thousand pounds that was awarded to Gordon Taylor, the chairman of the Professional Footballers' Association.

I understand the company's hope would be that in total it will pay out less than 拢20m.

News International is making the announcement today because it has approached Mr Justice Vos who is hearing the cases against News International, with a proposal for a group litigation order, which is a way of settling all the cases as a group.

Mr Justice Vos is planning to hold a case conference for all the active cases next Friday, and has asked for proposals from the litigants and the defendant.

There are 24 active cases in all. They include claims of breach of privacy brought by the film star Sienna Miller, the former Culture Secretary Tessa Jowell, the football commentator Andy Gray, and the designer Kelly Hoppen.

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News International may disclose later today which cases it will settle.

The company, which also owns the Times and Sun newspapers, said: "Past behaviour at the News of the World in relation to voicemail interception is a matter of genuine regret. It is now apparent that our previous inquiries failed to incover important evidence and we acknowledge our actions were not sufficiently robust".

News International said it will continue to cooperate with the Metropolitan Police enquiry. It is not clear whether it will dismiss further members of staff, following the recent departure of the news editor of the News of the World, Ian Edmondson.

Last week Mr Edmondson and the News of the World's chief reporter, Neville Thurlbeck, were arrested.

In January I disclosed that News International was to deploy the BP strategy of uncovering what went wrong and establishing a compensation scheme.

Update 16:00:

At this stage, I understand that News International is offering to settle with the following prominent individuals who claim their mobile phones were hacked:

1) Sienna Miller, the actor
2) Tessa Jowell, the former Labour culture secretary
3) David Mills, the lawyer and Ms Jowell's estranged husband
4) Kelly Hoppen, the designer, in respect of phone hacking in 2004-6, but not in relation to her later claim
5) Andy Gray, the former footballer and current commentator for Talk Sport radio (who left Sky Sports in embarrassing circumstances)
6) Joan Hammell, a former aide to John Prescott (though not Mr Prescott himself)
7) Ms Nicola Phillips, the assistant to the celebrity publicist, Max Clifford
8) Sky Andrew, the former Olympian and talent agent.

By the way, it is a matter of some significance that News International has conceded that its "previous inquiries failed to uncover important evidence" and that it acknowledges that its actions "were not sufficiently robust".

What this implies is that significant numbers of people at the News of the World knew about the phone hacking at the time. But News International is insisting that its senior executives were ignorant of what was going on.

This is certainly humiliating for the company. It implies that its management controls were woeful. But it is certainly less damaging than an admission that the hacking was somehow authorised from the top.

News International's chief executive, Rebekah Brooks - who is extremely close to Rupert Murdoch - is trying to demonstrate with today's actions that she is cleaning out the stables, and instituting much tougher management controls.

First of all, it does now look as though the implied UK contribution to the Portuguese bailout will be around 4.8bn euros or 拢4.2bn (in line with what I've been saying).

That is because European Union finance ministers meeting in Budapest today are working on the assumption that Portugal will ask for 80bn euros of rescue finance, and that this will eventually be provided on a similar basis to the Irish rescue.

So a third of the fund would come from the European Financial Stabilisation Mechanism (EFSM), a third from the European Financial Stability Facility (EFSF) and a third from the IMF.

The UK has no exposure to the EFSF, which is a fund backed only by eurozone members. However we have an exposure of just over 13.5% to the EFSM and of 4.5% to any money provided by the IMF.

Which means that the UK would be on the hook for a little bit less than 5bn euros for the Portuguese rescue.

That said, of this sub 5bn euros exposure, the UK's 3.6bn euros or so participation through the EFSM can be seen as pretty indirect.

Here is why.

The EFSM raises money from investors against the spare capacity in the European Union's budget. So if Portugal were to default on money borrowed from the EFSM, the first loss would fall on the EU's budget - which would only hurt us to the extent that we are a member of the EU and available resources for the whole EU would be depleted.

There would be a direct cost to the UK only if the loss generated by a Portuguese default were to exceed the available resources in the EU. Our contribution, should the EU's budgetary funds be exhausted, would be just over 13.5% of any incremental loss (because our contribution to the EU's budget is just over 13.5%).

I know this is complicated, but it does mean that there would have to be a cascade of accidents before the British taxpayer incurred any direct loss from Portugal's woes. Portugal would have to default. And the cost of that default would have to tip the EU's budget into the red before there was any draw down from the UK exchequer.

Which is certainly not an impossible chain of events. But nor is it a sure thing.

That said, as , the outrage felt by those Tories who implacably and forever oppose UK membership of the eurozone is understandable.

Their position is that the UK contributes to the EU's budget on the basis that the budget is deployed for the benefit of all the EU - not for the benefit of a subset, those who are members of the eurozone.

They are furious that Alistair Darling when chancellor gave permission for the EU budget to be deployed for eurozone rescues via the EFSM just before the general election. And they are pretty cross with the current chancellor, George Osborne, because they are convinced that as shadow chancellor he gave Mr Darling the nod that this would be okay.

All of which puts the Chancellor, George Osborne, in an awkward spot - even though there is no question of the UK providing bilateral assistance to Portugal, in the way it did for Ireland.

It explains why the Chancellor, George Osborne, hastily re-arranged his schedule to go to Budapest for today's EU finance minister's meeting, after Portugal's caretaker prime minister, Jose Socrates, announced on Wednesday night that his country would be applying for financial help (the Treasury minister Mark Hoban had originally been scheduled to stand in for the chancellor).

There are a couple of other points of a slightly less parochial nature that are worth making.

First, I am told it could take weeks for the details of the Portuguese package to be sorted, because EU finance ministers don't believe that Portugal faces an immediate liquidity crisis. They've been told that Portugal has enough residual cash in its state coffers to meet the 4.2bn euros debt repayment due at the end of next week.

That said, I am informed that the European Commission is doing "due diligence" on the precise state of Portugal's finances, because EU governments were caught on the hop by Mr Socrates's request for emergency aid.

That is not to say the bailout request came out of a clear blue sky (an absurd notion). EU governments have long been expecting that Portugal would require succour. It is just they were surprised it happened at precisely that juncture.

Second, there are economists and analysts who believe Portugal is burdened with too much official debt, that the only way for it to be set on a path of economic recovery is for that debt to be cut in value, for there to be a controlled default, a restructuring or haircut (to use the jargon).

However, for the avoidance of doubt, EU finance ministers are a million miles from being prepared to contemplate that (for reasons spelled out in ).

They could not allow a debt write-off for Portugal without conceding similar debt forgiveness for Ireland and Greece. And EU finance ministers are terrified by the potential consequences of forcing losses on to creditors of those countries (and not least for the strength of their banks), however reckless the creditors may have been in providing loans without due consideration of the risks.

For Portugal, as for Ireland and Greece, what is in contemplation by solvent EU governments is a refinancing - which some will see as temporary fix of the immediate problems of Portugal, Greece and Ireland, not a lasting cure to the underlying disease (which is that, arguably, they have all borrowed far more than they can afford to repay).

Update 12:25: Pals of Mr Osborne insist that he did not give any kind of backing to Alistair Darling's decision, after Labour had lost the election but before the coalition government had been formed, to agree that the EU's budget should be deployable in eurozone bailouts via the EFSM.

They cite, by way of evidence, this statement made in the Commons last December by Mr Darling:

"I discussed with the chancellor what we should do about the financial stability mechanism. He had his reservations and stated very clearly that he was against deploying it, and he asked me whether I should abstain, recognising that the decision was to be taken by qualified majority voting.
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"Both of us recognised, I think, that if we had abstained the proposal would still have gone through, because everybody else in the room wanted the mechanism to be deployed. I found myself in exactly the same position that he did just a few weeks ago when he was being asked to contribute (to the Irish bailout)".

Mr Darling went on to remind MPs that Mr Osborne actually voted in favour of allowing the EFSM to be used for the Irish rescue because - in the words of Mr Osborne - to have voted against "at this time would, I judge, be very disruptive."

To summarise therefore: Mr Osborne was unhappy about the use of the EU budget for eurozone bailouts via the EFSM, but he wanted Mr Darling to abstain on the issue, rather than vote against. In the end, Mr Darling voted in favour, because there was nothing the UK could do to block the EFSM, even if it had wanted to do so (or so Mr Darling believed).

To start parochially, the exposure of the UK to the financial mess in Portugal is comparatively limited.

People walk past a shop window reflecting the old downtown of Lisbon

According to figures from the Bank for International Settlements (the central bankers' central bank, to use the cliche), British banks have lent just $2.6bn (拢1.6bn) to the Portuguese public sector.

And the total exposure of UK banks to Portugal - including loans to banks and companies - is $33.7bn or 拢21bn.

So even if losses on all these loans - through defaults and restructuring - escalated to an implausibly high 33% of value, there would be a headache for our banks, though nothing much worse than that.

Which is one reason why the Chancellor George Osborne will minimise the UK's contribution to the Portuguese bailout.

Quite apart from the political imperative for him of not being seen to prop up a currency union, the eurozone, which doesn't include the UK, the fortunes of the Portuguese economy and financial sector are not of material concern to the UK - unlike Ireland, where British banks and exporters are up to their necks in it.

That said, the UK cannot avoid providing any succour to Portugal. As a result of our commitments to the International Monetary Fund and the European Union's European Stability Mechanism (ESM) Britain could find itself making an implicit contribution to a Portuguese bailout of as much as 5bn euros - or as little as 1bn euros (depending on whether Portugal taps the ESM or just the European Financial Stability Facility, to which the UK does not contribute).

The risks, predictably, are greater for Spanish, German and French banks, with $109bn, $49bn and $46bn of exposure to Portugal respectively.

But even in their cases, direct exposure to the financially challenged Portuguese government is limited: just $33bn of loans for all banks from the three countries together.

And loans to Portugal's public sector by all euro area banks (excluding loans by Portuguese banks) are just $42bn in total.

So if Portugal were eventually to default or to write down the value of its sovereign debt, the direct impact on the eurozone banking system would be embarrassing rather than devastating.

This however is to ignore two other highly relevant concerns.

First is that if Portugal restructures its debts, so as to reduce what it owes, that would probably only happen if Ireland and Greece engaged in similar writedowns.

And cross-border exposure of eurozone banks to public-sector Irish and Greek debt is $80bn (of which $65bn is Greek).

A writedown or haircut of Greek, Irish and Portuguese debt could cause difficulties for some eurozone banks.

And if such writedowns triggered losses on bank-to-bank lending - which it probably would - then the magnitude of potential bank losses starts to look troubling.

In this context, note that the exposure of just Germany's banks to banks in Greece, Ireland and Portugal is $80bn.

Or to put it another way, Germany has a very powerful interest in persuading Greece, Ireland and Portugal not to default - which, some would say, isn't necessarily captured in bailout terms for Ireland and Greece that are seen inside those countries as carrying punitive interest rates.

But in assessing the potential damage from the admission by Portugal's caretaker premier that the country needs an emergency loan, it is just as important to assess the vulnerability of Portugal's domestic banks - and of the European Central Bank.

As I have pointed out here before (see my 30 November post, the Perilous Condition of Portugal's Banks), Portuguese banks - financed by the European Central Bank and the Central Bank of Portugal - have in effect been funding the ballooning Portuguese government deficit.

Arguably, the European Central Bank and Central Bank of Portugal have been lending to the Portuguese state - without admitting as much - with Portugal's banks acting as agent.

Here are the statistics. From the end of December 2008, Portuguese banks' exposure to Portugal's central government rose from 4.7bn euros to 19.5bn euros.

That is a jump of 15bn euros over a couple of years, which represents around half of the Portuguese deficit in that period.

Or to put it another way, Portugal's government was only able to borrow what it needed by selling bonds because Portuguese banks were prepared to buy these bonds.

Now Portugal's banks were only able to lend to the government because they in turn massively increased what they borrowed from the European Central Bank and the Central Bank of Portugal.

According to statistics published by the Central Bank of Portugal, central bank lending to Portugal's banks increased from 14.4bn euros at the end of 2008 to 49bn euros two years later, a rise of 36bn euros.

And much of that central bank lending is secured via repo agreements on Portuguese government bonds (or loans to the Portuguese government) held by Portugal's banks.

That means the ECB is massively exposed to the health of the Portuguese state and to the health of Portuguese banks.

In this complex web of interconnected fortunes, it is also notable that Portuguese banks' exposure to other banks has increased over the past two years from 5bn euros to 30bn euros.

Also, the ECB has directly purchased perhaps a further 20bn euros of Portuguese sovereign debt (according to analysts).

All of which is to say that any default or writedown of Portugal's government debt would trigger a potentially destabilising chain reaction of losses for Portuguese banks, for eurozone banks and - perhaps most significantly - for the European Central Bank.

Or to put it another way, it is obviously a national humiliation for Portugal that it has had to request a rescue from its eurozone partners.

But this is one of those cases where the struggling debtor, Portugal, can be seen to be as powerful as the creditors, which include banks and the European Central Bank.

Default by Portugal might not be catastrophic on its own for the stability and strength of the European financial system - but if it were combined with defaults by Greece and Ireland (which it very likely would be) then the consequences for the integrity of the eurozone would be serious (and I will leave for another time the implications were Spain to be the next domino to tumble).

Here are the results of Portugal's auction of treasury bills.

Portugal has borrowed 550m euros for six months at an interest rate of 5.1% and has also borrowed 455m euros for a year at 5.9%.

This is very expensive money for a eurozone sovereign.

The interest rate on the 12-month loan is more than the 5.8% Ireland paid on average for it 7 1/2-year rescue loans from the eurozone and IMF.

And, as you know, the new Irish government is kicking up a stink that its predecessor agreed to unaffordable terms last November.

The new Irish premier, Enda Kenny, is negotiating with eurozone partners to get the rate down - lest the cost of servicing the loan traps Ireland in a vicious cycle of economic contraction.

On that basis, it would be unsustainable for Portugal to borrow such short-term money at 5.9%.

The result of Portugal's auction of treasury bills implies that investors are not convinced that they will get all their money back on the due date - they've demanded the kind of premium which implies (as a minimum) that there's a risk of a forced extension of the maturity of the loan, and that it could become subordinate to other claims on the country (such as rescue finance).

As for Portuguese politicians, the high rate for borrowing 12-month money on the market implies that any new government would be bonkers not to go for a eurozone/IMF rescue package - because it is increasingly difficult to see how a bailout could be more expensive (except in respect of national pride).

UPDATE 20:44听

Portugal鈥檚 caretaker premier, Jose Socrates, has disclosed that his country has today asked the European Commission for financial assistance. The process for negotiating rescue loans 鈥� which could be as much as 鈧�80bn 鈥� is now underway.

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Quite a lot has been happening at News Corporation over the past few days. So here are a few tenuously connected thoughts about it all.

First, what to make of James Murdoch's move to New York to become deputy chief operating officer of News Corporation?

That has been widely interpreted as a promotion, and as his anointing as heir apparent to Rupert Murdoch, his father, the chairman and founder of News Corp.

Is it quite as clear as all that?

It can be a bit of nightmare having the title "deputy" anything. The incumbents of such roles often lack the autonomy to prove themselves, and they're conveniently placed to soak up criticism when things go wrong.

Those of us who've been deputies in our time, albeit with shared responsibility for a few men and a mangy hound rather than a great media empire, usually see these positions as rites of passage of the most hideous kind.

Also, in the role he's leaving - Chairman and Chief Executive, Europe and Asia as well as Executive Chairman of the British newspaper subsidiary, News International - James Murdoch has the very great advantage that he is in London, a long way from the mothership in the US. That in itself delivers power.

And remember that this is a chap who till 2007 was chief executive of a very substantial, separately listed company, British Sky Broadcasting.

Arguably therefore James Murdoch is sacrificing quite of lot of personal independence and autonomy in the relocation to New York.

Finally, and this is the oddest thing of all, the press release announcing James Murdoch's appointment contains a flattering quote about him from Chase Carey, his immediate boss as chief operating officer. But there is nothing at all from the bloke who really matters, the ultimate boss, his dad, Rupert Murdoch.

Kremlinogists would see that as a symbolically important public confirmation of the hierarchy: Rupert Murdoch is unambiguously in charge; and James Murdoch reports to Rupert Murdoch's number two.

So although James Murdoch may well be in the best position to ultimately assume control of the whole of News Corporation, he is probably more of an heir presumptive than an heir apparent: there are normally personal risks associated with working in close proximity to what the French would call "le patron"; the press release naming James Murdoch as next chairman of News Corp could yet never be written.

Second, how damaging for News International and News Corporation are the arrests of the former news editor of the News of the World, Ian Edmondson, and the current chief reporter of the News of the World, Neville Thurlbeck?

Well News Corp sources tell me they were not surprised. "We assumed this day would come" said one. "We supplied the evidence to the police. If we hadn't given vast numbers of e-mails to the police, what would they have?"

The point is that News Corporation and News International have already suffered serious reputational damage from the disclosure that a private detective hacked into mobile phones to obtain stories for the News of the World.

What matters now is whether the police build a case implicating News International executives in the alleged crime, whether News International as a corporate entity is vulnerable to being charged, and how News International deals with compensation demands from those celebrities and prominent individuals who claim that their right to privacy has been breached (see my post Murdoch employs BP strategy for more on this).

Thirdly, and lastly, with James Murdoch relocating to New York, does News Corporation retain its appetite to own all of British Sky Broadcasting - since James Murdoch was running the takeover bid for BSkyB?

I think it does. But I would be surprised if News Corporation were to attempt to agree a price behind the scenes with BSkyB's board.

My hunch would be that as and when Jeremy Hunt, the culture secretary, makes his formal announcement that the bid can proceed - which probably won't be till after the royal wedding (for reasons that are slightly opaque) - News Corp will announce that it is prepared to pay around 820p per share for the 61% of BSkyB it doesn't already own.

That's broadly in line with the current share price. But way less than is wanted by some independent shareholders, such as Odey.

The threat from News Corp would be that if the board and investors turn down that offer, BSkyB would come back in a few months time - when various commitments on the takeover process it agreed last year elapse - with a much lower offer, of around 750p per share.

This would be the tricky question in effect posed by News Corp for BSkyB's board and shareholders: is BSkyB's recent strong performance sustainable in a consumer climate in the UK which appears to be deteriorating very fast and where there are huge looming disruptive technological challenges to be faced (from TV delivered over broadband internet, in particular)?

That said, I am clear that Rupert Murdoch is determined to press ahead with the bid for BSkyB. And, funnily enough, I wasn't persuaded of that a few weeks ago.

Good and bad news from HMV this morning.

It now expects profits for the current year to be even less than feared a few weeks ago: around 拢30m, down from 拢69m last year.

As for its market value, that is less than last year's pre-tax profits, at 拢65m. Or to put it another way, its 15p share price is an option that maybe it won't go bust.

In respect of its life-or-death negotiations with bank lenders, led by Royal Bank of Scotland and Lloyds, HMV says there is better news.

It has in effect gained another couple of months to secure a new borrowing agreement with the banks, because there has been a two-month extension to 2 July for the date at which its breach of its borrowing covenants will become a formal reality.

Anyway, you probably don't need telling that 2011 is shaping up into the worst period for retailers since the onset of the 2008-9 Great Recession, when Woolworths and Zavvi went kaput.

Just this week, Oddbins - the wine retailer - went into administration. Next has already spelled out the serious challenges ahead (though it still expects to grow profits marginally). And tomorrow Marks & Spencer will warn that the outlook is tough.

Back when the economy fell off that cliff in late 2008, retailers were bailed out by the massive injection of cash into consumers' pockets, when the Bank of England slashed interest rates to record lows and created new money on an unprecedented scale.

Coupled with a cut in VAT, millions of households received a boost to their disposable income. Although wages were flat, consumers suffered nothing like the peak-to-trough 6% per cent reduction in annual UK output or GDP.

Funnily enough, this year could feel much more like a recession for households, even though in terms of headline GDP the economy may continue to grow (albeit very insipidly).

The big weight is 拢1.5 trillion of household debt, which remains close to a record in respect of its relationship to disposable income. That 拢1.5 trillion is equivalent to around 150% of gross household disposable income, which is considerably greater than it has ever been (except in the last five years).

Back in 2000, after eight years of consistent and significant increases in consumer spending, the ratio of household debt to disposal income reached what was for then a very significant new high of 100%. But as a nation of shopping and housebuying addicts, we kept on borrowing.

That said, households have been saving a bit more since the economic shock of three years ago, and following their net dissaving of the boom years. But our slightly improved propensity to save has not been enough to make any serious inroads into that mountain of borrowing.

So households face a huge squeeze on their spending power this year - which means that weaker retailers face a horrendous time.

The quintuple whammy, so to speak, is of sterling oil and fuel prices at record levels, cotton prices that have surged, food prices that are rising, VAT that has already gone up and interest rates that are expected to rise this year.

When you combine all that with unemployment that is high and expected to rise a bit more, and salaries that are rising at no more than 2% to 3% on average - or half the rate of headline inflation - then you can see why so many of us expect to feel poorer in 2011.

Who has the greatest power over our sense of prosperity and the plight of our shopkeepers? Probably the monetary policy committee of the Bank of England.

As the Bank of England has itself pointed out, the sheer size of all that household debt means that it doesn't take a very significant rise in interest rates by historical standards for households' available cash to be squeezed to the parlous levels that took the UK into recession 20 years ago.

I was slightly remiss in my coverage of the green light given by the Culture Secretary Jeremy Hunt to News Corporation鈥檚 plan to buy British Sky Broadcasting, in failing to highlight :

鈥淭he OFT also advises the Secretary of State that the amendments to the Revised UIL (undertakings in lieu) do not address the essential structural limitation identified in the report, that the UIL offered are unlikely to be practically and financially viable over the long term鈥�.

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If you鈥檝e read this far, you are probably scratching your head: I had better translate.

The competition watchdog was advising Jeremy Hunt that the conditions he is imposing on News Corporation - which are designed to maintain the independence and distinctiveness of Sky News - are unlikely to be effective for more than seven-to-ten years.

Or to put it another way, if News Corp succeeds in buying BSkyB, and if then News Corp does as ordered and floats off Sky News into a new stock-market listed company - which would be 39% owned by News Corp but would have its own board, independent chairman and independent editorial committee - that would preserve Sky News as a distinctive voice in news, more-or-less separate from Rupert Murdoch鈥檚 News Corp until around 2020.

But after that, according to the OFT, all bets are off. Sky News could then become completely subsumed into the Murdoch's sprawling news empire, which in the UK includes ownership of the Sun, the Times, the News of the World, and the Sunday Times, inter alia.

So if preserving the autonomy of Sky News is the sine qua non of adequate media plurality in the UK - which is what Mr Hunt has acknowledged - then media plurality (or a sufficient diversity of news providers) would be in jeopardy before this year鈥檚 school entrants are sitting their GCSEs.

Now, in the context of the longevity of the brands that have dominated news in the UK throughout the decades of mass media - like the Times, the Sun, ITN, the Telegraph, Mirror, Guardian, Mail and 91热爆 - that doesn鈥檛 seem far off.

But it does seem like an eternity away at a time when the technology for distributing news and the business models of news providers are changing at lightspeed and in unpredictable ways (a big hello to the iPad, online paywalls and Twitter).

Either way, the impermanence of the shackles or undertakings in lieu put on News Corp - as perceived by the OFT - offers the best hope for opponents of the takeover, such as BT and the owners of the Telegraph, Mail, Mirror, Guardian and so on, that the courts could frustrate or delay the deal.

So as and when Mr Hunt comes to a final view on all this, having reviewed the submissions he has received during last month鈥檚 consultation, what could he do to protect himself from judicial review?

Well he could adopt a recommendation made to him by , the media regulator, that would give new powers to Ofcom to initiate investigations of the media industry as and when it believes that plurality is under threat, or when it perceives there may be inadequate diversity of life-forms in the news jungle.

Right now Ofcom can only conduct such a review when asked to do so by the culture secretary in the context of a takeover bid. But quite apart from what you might call the Murdoch issue, the technological revolution in news may well make it sensible - for the health of democracy - for Ofcom to be permanently and continuously scrutinising the health of the ecosystem in news (couldn鈥檛 resist the management-speak jargon - sorry).

听

There is one other thing Mr Hunt could do to reassure those who fear that the big media beasts, such as Rupert Murdoch, will always get their way, because governments live in terror of alienating and upsetting them.

The culture secretary could announce that when it comes to the final adjudication on media plurality issues, he and his successors will be castrated - that he plans to adopt the competition law model, where the regulator鈥檚 word is final, and where politicians are wholly removed from the decision-making process.

It is something he has been thinking about, although he does not have a settled view on it.

If he were to give up his role as judge in media plurality cases, that could increase public confidence that verdicts on whether to allow the expansionist ambitions of any particular media mogul would be taken without the risk of a minister鈥檚 judgement being tainted by fears of said mogul exacting his or her revenge in the columns of the Daily Bugle.

Apart from anything else, I do not believe that Mr Hunt, or indeed the prime minister, relish being widely characterised as the lapdogs of Mr Murdoch, however far from the truth they may feel that characterisation to be.

Even so, although the depoliticisation of media plurality decisions is a seductive idea, there is a problem with handing that baby over to Ofcom, in all its pink and burping beauty. Media plurality is a young legal construct, invented by the last government, and no one is quite clear exactly what it means.

Also, if media plurality is essentially about conditions in the media that are essential for healthy, lively democracy and culture, it may be quite tricky to argue that the judgement of our elected representatives has no part to play.

For the avoidance of doubt, BP has not yet received formal permission from US regulators at the Bureau of Ocean Energy, Management, Regulation and Enforcement to resume drilling in the Gulf of Mexico.

You would be forgiven for believing that the thumbs-up has been given, since that is what has been conveyed in newspapers and on the wires over the past 24 hours (following ).

Now BP would presumably not be so dim as to allow a story like this to run unless it were about to come true. And I am told that US regulators have given it an informal nod, so to speak: in July it can get back to work in the waters it polluted not so very long ago.

And that, from the point of view of BP's management, would be quite an achievement.

Certainly last summer, when BP was corporate enemy number one in the US, it seemed inconceivable that BP would so soon again be drilling wells where an explosion on the Deepwater Horizon rig killed 11 workers and set in train a despoliation of seas and coast perceived in the White House as of unprecedented seriousness.

Presumably the US authorities are persuaded that and how it can prevent future drilling accidents now makes it one of the world's safer oil companies.

Curiously though, an influential organisation that advises BP's shareholders .

In an unusual move, s - a governance analysis and proxy voting firm that advises institutions which manage $17 trillion in assets - is advising investors to vote against the approval of BP's annual report and accounts at next week's annual meeting.

Glass Lewis says that the report and accounts contain inadequate detail on "the specific steps the company is taking to prevent a recurrence of such an enormous disaster". And it therefore urges shareholders to "voice their opposition to these deficiencies by rejecting the company's report and accounts".

Now BP would say it has taken very public steps to improve its management of risk, including the creation of a specialist safety division which will have the power and resources to intrude into every nook and cranny of the business.

But if Glass Lewis feels that BP's intent to rehabilitate itself isn't captured in the annual report and accounts, which can be seen as its main contract with its owners, that is not a trivial criticism.

And it is also pretty embarrassing for BP's board that Glass Lewis recommends that shareholders vote against the re-election of members of the Safety, Ethics & Environmental Assurance Committee, namely Bill Castell, Antony Burgmans and Cynthia Carroll.

It will be fascinating to see which, if any, of BP's bigger shareholders follow Glass Lewis's advice. But tension between BP's management and its owners at this critical juncture - when, as I mentioned, BP hasn't yet been given a formal licence to resume drilling in the Gulf and is some way from resuming business as usual in the US - is unfortunate.

The Treasury select committee's conclusion that there is inadequate competition in retail banking would be embarrassing at any time for the UK's big banks.

Because in reaching this conclusion, the MPs on the committee accuse Barclays, Royal Bank of Scotland, Lloyds, Santander and HSBC of not giving customers adequate information about the costs of current accounts that would allow those customers to make a simple, rational assessment of whether to take their business elsewhere.

And the MPs say the process of switching banks remains too cumbersome and daunting for most of us.

Probably all you need to know is that a maximum 9% or so of retail customers move their current accounts in any year, and the more relevant figure - when adjusting for what consumers do with relatively unimportant second or even third accounts - may be as low as 3% per annum.

By comparison, more than a quarter of customers each year switch providers in telecoms, energy and even credit cards. And, believe it or not, the energy regulator believes there is too much inertia in the gas and electricity market, so goodness only knows what he would make of what goes on in banking.

The current account market does not seem to be one in which we shop around for the best deals, partly because the deals on offer look the same - though in practice the complexity and opacity of charges means we can end up paying vastly different amounts at different banks for identical transaction patterns.

And since current accounts are the gateway to so many other financial services, MPs see the big retail banks as operating in a cosy, protected world.

An assessment, included in the select committee's report, by John Fingleton, director general of the Office of Fair Trading, is particularly damning. Mr Fingleton said that the banking industry is:

"Clearly much less competitive than a lot of the sectors we look at. In huge sectors of the economy - retailing, distribution, airline transport, and so on - we see high levels of competition, innovation, costs coming down and no real difficulty in firms earning a profit for their shareholders and managing to pass on low prices to customers - (firms) being very innovative in the process and driving up productivity growth in the economy. That picture does not characterise the banking sector."

One part of the report is a comedic must read: it recounts bankers' obfuscating answers to questions about whether it is possible for consumers to know how much they're really paying for current account services. Here is a flavour:

"Ms Weir (Helen Weir, the departing head of retail banking at Lloyds) seemed confident that consumers would know the cost to them of operating a current account, telling us that 'most consumers would have a pretty good idea of what they are paying for their current [account] banking.' However, when we pressed her to say how much she paid in terms of interest foregone herself, she was unable to answer."

What's the answer?

Well the MPs want the soon-to-be created new financial regulator, the Financial Conduct Authority, to have a primary objective of promoting competition. And they urge that the eventual privatisation of taxpayers' stakes in Lloyds and RBS should be carried out in a way that serves the public interest in respect of its impact on competition.

But funnily enough, none of that is what will really worry RBS, Barclays and HSBC. Much more disturbing for them is that the MPs on the committee - who are from all the parties - say the mega banks have an unfair advantage as a consequence of their sheer size and importance to the British economy, which makes them too big to fail, always rescued by taxpayers in a crisis.

As too-big-to-fail institutions, the big banks can borrow more cheaply than smaller banks, because creditors know their loans are in effect guaranteed by taxpayers (yes I know I've been blathering on about this in a rather repetitive way for months - sorry).

And this perception that the mega banks can't possibly go bust is also an enormous reassurance to ordinary depositors and savers - which is another competitive advantage they have over banking newcomers and tiddlers.

So the MPs say they are pleased that the Independent Banking Commission, set up by the Treasury, may propose that banks put strong firewalls between their retail and investment banking operations - which would allow one part of a mega bank to fail without needing to be bailed out by the state.

Such a reconstruction of giant banks would, the MPs think, go some way to addressing the too-big-to-fail problem and have benefits for both financial stability and for competition.

Which is the last thing the banks themselves want to hear. They are bitterly opposed to the idea of putting their investment and retail arms in separately capitalised subsidiaries, fearing that would lead to a massive increase in their costs.

However the statement by the MPs that they are "encouraged by signs that the Independent Banking Commission is already considering ring fencing as a possible solution" rather implies the mega banks may have already lost what they would see as the most important part of the argument about their future.