Some bankers might claim that they are doing God’s work. But the banks all owe their continued existence to the British and American taxpayer.

Some have been supported directly — RBS, Lloyds-HBOS, and the fully nationalised Northern Rock — but all benefit from the guarantee that they will not be allowed to fail. UK banks have received the equivalent of £1 trillion — £1,000 billion — in taxpayer cash or guarantees. No other industry enjoys such protection. It should pay for it until it can be restructured so that it no longer depends on taxpayer support. That is why I believe banks should pay an extra levy on their profits as a form of insurance premium.

Mervyn King, the Governor of the Bank of England, continues to remind us of the central issue in banking policy: that the present structure is unstable and dangerous for the UK economy. Banks whose balance sheets are collectively four to five times bigger than our GDP — a far greater imbalance than in any other leading economy — depend on an implicit or explicit UK government guarantee if they fail.

At present banks have every incentive to expand into high-risk activities knowing that if they are profitable they boost returns and bonus pots, but if they fail they enjoy a state guarantee. The largest banks are too big to fail — and thus are too big. The status quo is unsustainable and bad for UK plc. Even those of us who want the financial service sector to flourish draw the line at the commercial risk of individual bank failures becoming sovereign risk for the UK.

That is why banks must be broken up, going way beyond the welcome but limited tinkering envisaged by the European Commission. The aim should be to ensure that banks engaged in high-risk activity on a global scale will be allowed to fail. Various ideas are being canvassed — from “living wills” to higher capital requirements for high-risk institutions. But commitment to reform is slackening as a “business as usual” mood takes over. Action must be taken quickly and, if necessary, in the UK alone, as it is here, rather than the US, France or Germany, that systemic risk is concentrated.

One step, which could be taken quickly in the Pre-Budget Report, is the introduction of a levy on pre-tax bank profits to ensure that banks pay for the taxpayer guarantee. I have suggested a figure of about 10 per cent, which, under present conditions, would realise about £2 billion towards reducing public sector borrowing and the structural budget deficit for which the banking crisis is largely, if not exclusively, responsible.

Before we hear predictable groans about another tax burden on the poor old banks it is worth noting that, at present, they pay very little corporation tax. Loss-making banks do not pay tax at present and, more worryingly, profit-making banks can take advantage of Britain’s exceptionally generous provisions for offsetting previous losses against tax. Merrill Lynch seems to have cooked up an outrageous deal in which it can offset global losses against future UK profits for the next 60 years. Britain’s public sector finances cannot afford such shenanigans.

The 10 per cent levy on profits would be paid come what may. It is far from penal; but if it really bites it would provide a powerful incentive to work with the authorities on a mechanism for splitting up banks sooner rather than later. Financial institutions already pay for deposit insurance and this bears disproportionately on building societies that depend predominantly on deposits for their funding. The levy we propose is to cover wider risk and there is a strong case for exempting mutuals, which are not, in any event, banks in FSA terms.

I have been asked how such a levy would influence new lending for good commercial borrowers or mortgages. That is a separate issue and centres on practice in state-owned banks, which are failing to meet net lending targets (and are not trying very hard).

It is for the Government and its directors in UK Financial Investments (UKFI) to insist that the wider national interest requires a more positive approach for small and medium-sized businesses. That should happen in any event. It involves state-owned banks being told that supporting good businesses takes precedence over boosting balance sheets to facilitate a quick dash back to private ownership This levy isn’t meant to solve the vexed issue of bonuses. It would reduce the bonus pools of investment banks but I would not claim anything more. Separate action is necessary. We need to shine a light into dark corners. The Walker report points in that direction but is hopelessly vague and voluntary. All bankers’ remuneration packages greater than the Prime Minister’s — say £200,000 — should be publicly declared, just as directors’ are. Like MPs and BBC executives, bankers depend, albeit at one remove, on the taxpayer and should not be allowed to hide what they earn.

Sometimes the best ideas are the simple ones. A modest levy on bank profits has a specific purpose — to provide insurance as long as banks enjoy a taxpayer guarantee — and raises a useful sum to reduce government borrowing. It can, and should, be introduced quickly. By contrast the Government’s proposed Tobin tax on international currency trading is fraught with technical difficulties and has no prospect of being implemented soon. And its proposed legislation for “tearing up” individual bankers’ contracts is so implausible and complex that one must assume it was dreamt up solely for soundbite purposes.

The banking sector is too important to be allowed to drift back to business as usual, accompanied by threats and blood-curdling rhetoric that change nothing. The key issue remains how to create a robust structure for British banking. A levy to pay for continuing taxpayer guarantees should help to create that.

Vince Cable is Liberal Democrat deputy leader and Treasury spokesman

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