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HSBC is back to making near record profits, of not far off £12bn ($19bn) - having come through the worst banking crisis in 75 years relatively unscathed.

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The loss on debts going bad is back to where it was before the credit crunch. And this sprawling global group is profitable in every part of the world again, even the US where it was traumatised by subprime losses for three years, for the first time since 2006.

So if HSBC was one of the canaries in the coalmine in early 2007, when it was the first major bank to warn of the scale of the US subprime meltdown, some will see its 2010 profits rebound as a sign that better times for most banks will follow.

HSBC's relative strength is why, perhaps, its new chairman Doug Flint is being more aggressive than his peers at other UK banks in attacking proposals to make banks safer and pay for the sins of the past.

He claims that it is a "near impossibility" for banks to lend more to business if they are forced to lend more to governments - by buying allegedly risk-free gilts and other government bonds - as a result of new liquidity rules.

And he is sceptical that the banking system will be made more stable by proposals to force the biggest banks - what are known as Systemically Important Financial Institutions (or SIFIs) - hold more capital relative to assets as a shield against future losses.

"It is not clear that the reduced shareholder returns that would follow the imposition of incremental capital would be compensated for by improved stability", he says.

Mr Flint makes the argument which I attributed to a senior bank boss in one of my posts from Davos to the effect that singling out SIFIs for greater regulatory protection could make them even bigger - because lenders and investors would tend to discriminate in their favour even more than they currently do when deciding where to place their funds.

So if part of the problem is the concentration of the industry in the hands of a few mega banks like HSBC, Mr Flint would say that the problem would be worsened by plans to concentrate regulatory effort on making these mega banks strong enough to withstand any storm.

Although for him, I would guess, the risk of making that argument may be that it could strengthen the case of those arguing for the likes of HSBC to be broken up (Mr Flint would not be keen on a forced dismantling of HSBC).

There is also a warning shot fired across the bows of George Osborne and the government. Mr Flint complains that the new British levy on banks applies not only to the balance sheet of its UK operations but also to the liabilities of its overseas businesses: "this therefore constitutes an additional cost of basing a growing multinational banking group in the UK" he says.

HSBC's just-appointed chief executive, Stuart Gulliver, says that £250m of HSBC's estimated annual bill from the levy of £375m stems from operations outside the UK. He describes this as an "explicit incremental cost of being headquartered in the UK for any global bank".

Which will be seen as another way of saying that HSBC doesn't have to keep its HQ in the UK - although Mr Gulliver says it "hopes" to do so - if the costs of doing so become excessive. This is not the first time we have heard that kind of thing from HSBC, although that doesn't necessarily mean that possible emigration is an empty threat.

In campaigning for a reform of the levy, HSBC hopes to enlist the support of its shareholders. Mr Flint says that HSBC will increase future dividends to the extent that the government listens to its complaints and reconstructs or relieves the levy.

So that would be £250m more for investors, and £250m less for the exchequer, if HSBC were to have its way.

Update 11:00: HSBC's new chief executive, Stuart Gulliver, is receiving a bonus of £5.2m in respect of his previous role running the bank's investment banking operations, on top of salary, allowances and benefits in kind totalling £971,000.

He has chosen to take all of it in restricted shares which will only be released to him over time.

It is a lot of money. And it will upset those who see most banks as part of the economic problem, rather than part of the solution.

That said, HSBC is one of the world's very biggest businesses - with a market value of £126bn, greater than the combined value of Barclays, Lloyds and RBS.

And in a US context, Mr Gulliver's £6m or so is not huge bucks.

Also, HSBC was a very rare bank that did not need bailing out by taxpayers in the great crash of 2008.

If there is an issue about Mr Gulliver's bonus it is probably about levels of pay in the banking industry in general - and whether bankers' remuneration is excessive in the sense that banks' profits have for years been inflated by a series of unsustainable or socially valueless practices (which is an argument that the chairman of the Financial Services Authority advances from time to time).

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• - What's this?

Although Lloyds is back in the black for the first time since the great crash of 2008, its profits actually fell in the second half of last year compared with the first half - from £1.6bn to £609m.

On the so-called statutory measure of profit, Lloyds actually made a loss again in the second half of the year - of just over £1bn.

Much of that deterioration in the latter stages of 2010 was due to Ireland's economic woes.

Lloyds' losses on Irish loans going bad increased by £1.4bn to £4.3bn.

For the bank as a whole, and over the course of the entire year, there was however a reduction of more than £10bn in the overall bad debt charge.

There was strong profits growth in Lloyds' market-leading UK retail bank, while its wholesale operation returned to a fairly substantial profit of £3.3bn.

Another sign that Lloyds is returning to health - after its controversial merger with HBOS two years ago - is that it reduced by £61bn the amount it has in effect borrowed from taxpayers via exceptional loans and guarantees provided by central banks and the Treasury.

But it still has a further £91bn to repay over the coming year and a bit - which it may not find easy.

Update 08:30: I have just interviewed Eric Daniels, who stands down as Lloyds chief executive on Monday (though he will stay on at the bank in an advisory capacity for a few months).

He said he hadn't decided whether to take his £1.45m bonus for 2010. Payment is deferred, he pointed out, and he would decide at a later date whether to actually pocket it.

To the last he has no regrets - even though he stressed in the interview that most of the group's woes over the past couple of years stem from HBOS's lamentably poor corporate loans.

On the Irish losses, he said the bank was being ultra conservative in the provisions it is making against likely future problems with loans there.

And he was confident that Lloyds would be able to repay all that money it has borrowed from taxpayers: he said that since the end of the year, Lloyds has repaid a further £13bn, so it now has to pay back another £83bn in the next year and a bit.

Update 10:11: For those who care about these things, I am told that of the outstanding £83bn owed to taxpayers, around £40bn is money borrowed from the Bank of England via the Special Liquidity Scheme - which has to be repaid in 2012.

And most of the rest is in the form of debt issued by Lloyds and guaranteed by the Treasury via the Credit Guarantee Scheme - which also has to be refinanced over a similar time scale.

At a time when wholesale funding markets are nowhere near as deep or liquid as they were before the Crunch of August 2007, Lloyds is not planning to replace all this public-sector support with commercial debt.

It says that rather than finding new lenders, it plans to "right size the balance sheet" (horrible banker-speak for shrinking its balance sheet), so that it has fewer assets (loans and investments) that need funding.

Which, as if you needed telling, means that there will continue to be constraints on Lloyds ability to provide new loans to households and businesses.

Update 12:45: Lloyds’ latest results will add fuel to the fiery debate about whether this bank is doing enough to support the UK economy.

In its market leading retail operations, loans and advances fell 2% to £363.7bn. And in Lloyds’ wholesale division, loans and advances to corporate customers dropped 10% to £160bn.

Lloyds insists that it is not being stingy about offering loans to householders and businesses. It says this shrinkage in how much it lends reflects customers’ decisions to repay loans and reduce indebtedness.

Or to put it another way, it argues that net lending is in decline because of a lack of demand, rather than a policy decision by Lloyds to restrict supply.

Its critics, of course, allege that Lloyds simply doesn’t want to lend, having been burnt by HBOS’s excesses and because of the pressure from regulators to increase the ratio of capital to assets.

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• - What's this?

Having just stepped off an overnight flight, I am even less tolerant than usual of the pea soup that is presented by a mega bank such as Royal Bank of Scotland as its annual results.

To be fair to RBS, its figures - which run to 273 pages of tables and written interpretation - are only slightly more baffling than Barclays' were last week.

It is a nightmare trying to work out what the true story is at banks like these, because of all the revaluations of debt, the restatements of prior years due to disposals, the marking-to-market of some investments and loans and the provisions against losses on others, the impact of historic takeovers, the sheer size, diversity and complexity of their operations, and so on.

Impenetrable

For Royal Bank of Scotland, for example, we are presented with a pro-forma operating profit, a statutory attributable loss, profits for its "core" operations and losses for its "non core" operations.

All these figures tell you something about RBS, but they are not exactly saying the same thing.

When it comes to banks, there is an argument that all the accounting reforms of the past decade have served to make them even more impenetrable than they were when I started looking at these important financial beasts in the 1980s.

Back then the criticism of banks' results was that they were whatever fiction the general managers at the time decided to publish, because of their ability to disguise the underlying trend with so-called general provisions against losses and transfers to hidden reserves.

These days the criticism would be that most of the banks' boards won't have the faintest idea what is really going on in their organisations, unless they have superhuman analytical abilities.

'Pro forma' profit

So what is there to say about RBS's performance in 2010? Well on most measures, RBS did better than in 2009.

The statutory attributable loss was £1.1bn, and £24.3bn in the annus horribilis of 2008. But, to state the obvious, on that measure it is still making a loss - almost three years on from the great banking crash.

But seen from the perspective which RBS seems to prefer (because it comes at the top of its press release), the bank is back in profit. The "pro forma" operating profit - which includes an adjustment for the weirdness of the structure of RBS's ill-fated takeover of the rump of ABN in 2007 - was £1.9bn, compared with a loss of £6.1bn in the previous year (although precisely a year ago, RBS said the operating loss for 2009 was £6.2bn, so £100m has gone missing some time between then and now - but I suppose £100m is a mere bagatelle in the context of losses as large as these).

So depending on your point of view, RBS either returned to profit last year or made a smaller loss - both measures of progress.

Into reverse?

But there is another story in these 273 pages. What RBS defines as its core - the bits it wants to keep - made an operating profit of £7.4bn, which is an impressively big number, but it is actually 12 per cent lower than what this core made in 2009.

So on that measure, RBS went into reverse.

Except that all of that fall is attributable to its investment banking division, Global Banking and Markets, which had an exceptional and unsustainable bumper year in 2009. By contrast, the bits of RBS which most people know and deal with - the retail and commercial operations - saw a rise in operating profits from £6.3bn to £7.4bn.

Here are a few final thoughts:

First, the post-tax valuation loss of £1.1bn on the insurance against future credit losses provided by taxpayers to RBS - which goes by the name of the Asset Protection Scheme - would tend to prove that taxpayers got the best of this deal (which you might say is only fair, given how much pain has been inflicted on the economy by reckless banks).

Second, if you're wondering why RBS's shares seem incapable of breaking through the price paid by taxpayers for their whopping 83% stake - 50p or so - the best explanation is probably RBS's ratio of core Tier 1 capital to assets (which measures how much capital banks have in reserve to absorb losses and protect depositors from those losses).

At 10.7% that capital ratio looks okay compared with many of its international rivals, although it is a bit lower than last year. However, RBS is exactly the kind of bank which may be hit with a capital surcharge by a combination of this year's deliberations by both the Basel Committee on Banking Supervision and the UK's Banking Commission.

If RBS is forced by regulators to increase its core Tier 1 ratio (and the chances of that are way better than 50:50), that would probably both delay the time at which it resumes paying dividends and force it to ask investors for yet more capital.

Which is why it may be some time before RBS shares are significantly above 50p each, such that the Treasury can sell taxpayers' RBS shares back into the market at anything which looks like a proper profit.

Finally, some would say that the RBS number which really matters is the value of the assets owned by shareholders - which, to boringly repeat, includes all of us, since taxpayers have that enormous RBS stake. That number for net tangible equity per share has fallen again, from 51.3p per share to 51.1p per share at the end of 2010.

Unless and until the value of net assets owned by us as RBS shareholders starts to rise in a serious and sustained way, it will be difficult to argue that this bank has been fixed.

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• - What's this?

The Treasury's paper on breaking up the Financial Services Authority and reforming the Bank of England, published today, represents something of a revolution not only in the regulation of the City of London but also in the management of the British economy.

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Because it heralds the creation of a new institution within the bosom of the Bank of England, to be called the Financial Policy Committee (FPC), which can in some ways be seen to be as powerful and important as the Monetary Policy Committee, which sets interest rates.

For the UK's big banks - the infrastructure of the British economy - the FPC will probably be regarded as more relevant to their fortunes than the MPC.

And for the rest of us, arguably the FPC will also be more important in determining the long-term structure, stability and growth potential of the British economy than the MPC.

How so?

Well the FPC's mandate will be to identify where dangerous risks are developing within the financial system - as opposed to risks at individual banks - and then do something about those risks.

The Treasury highlights two potential sources of risk in particular:

1) Systemic risks attributable to structural features of financial markets or to the distribution of risk within the financial sector; and

2) Unsustainable levels of leverage, debt or credit growth.

It is giving four general capabilities to the FPC to address such risks, as and when they emerge:

a) The FPC would make public pronouncements and warnings when it sees dangers in the system;

b) When the flaws in the system are global or international in nature, the FPC will try to negotiate reforms with international regulatory bodies;

c) The FPC will provide advice to the two soon-to-be created new bodies that will regulate individual firms, the Prudential Regulation Authority(PRA) and the Financial Conduct Authority (FCA), on what they might do to ward off potential risks through interventions with banks and other firms;

d) Finally, the FPC will have powers over the PRA and FCA to make recommendations, which the PRA and FCA will either have to implement or explain publicly why not; and most importantly of all, the FPC will have powers from secondary legislation to significantly influence the behaviour of banks and other financial institutions, by directing the PRA and FCA to do certain things on its behalf.

So the creation of the FPC may well be seen as the formal death announcement of a laisser-faire ideology that prevailed in the City of London until the great crash of 2008.

For example, if the FPC believed banks were in general lending too much and too cheaply, it could direct the PRA to raise the capital requirements of banks (the minimum amount of capital they have to hold in relation to the loans they make) - which at a stroke would significantly reduce the flow of credit and also increase the costs for banks of lending (in normal conditions, capital cannot be raised by banks either cheaply or quickly).

Or the FPC could direct the PRA to increase the risk weighting attached to certain categories of credit - which would have the effect of forcing banks to hold more capital relative to that kind of lending, and thus nip an incipient bubble in a particular market in the bud. So for example if regulators had done this for mortgages in the five years before 2007, it would have been more expensive for banks to provide mortgages, and there might not have been quite such a dangerous boom in the housing market as the one we experienced.

Other possible tools for the FPC would be the ability to require that banks set aside funds to cover the risks of losses on certain kinds of lending and investing, in a process known as dynamic provision - whose point is to build up reserves at banks to protect them and their depositors if the loans go bad.

The Treasury paper also talks about possibly giving the FPC powers to force banks to demand more collateral from borrowers in certain circumstances. In a housing boom the FPC could - as an example - ban mortgages worth more than 90% of the value of properties.

In addition, the FPC could force banks to make greater disclosures about their activities, so that creditors and shareholders would have a greater ability to assess the risks taken by the banks and respond accordingly.

The explicit scope of how the FPC could intervene is therefore pretty board. What's more if other ad hoc tools are deemed to be required to tackle an incipient crisis, the Treasury would be able to legislate instantly to provide those powers - with approval by Parliament required within 28 days.

To sum up, the FPC is set to be given unprecedented powers over financial institutions en masse, over the financial economy as a whole. In terms of determining the long-term flow of credit, it may well turn into the most powerful body in the land.

Which is why checks and balances are being built into the new system.

The FPC will publish minutes of its deliberations (though it will have the ability to redact the most sensitive parts of its discussions).

It will be accountable to the Treasury Select Committee, in the way that the Monetary Policy Committee has been for years (is there a danger of the TSC becoming over-burdened?).

And what some will see as most important of all perhaps, there will be a legislative requirement on the FPC not to take actions that would "in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term".

Here, of course, is the tension that the FPC will have to confront every waking minute: how to take risk out of the system without stymieing the supply of vital credit, or crushing those creative instincts of banks that are benign (some of you won't believe this, but not all innovation by banks is an attempt to gull the customer).

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• - What's this?

On this question of which profit number is the correct one for Barclays (see my earlier post), I feel obliged to point out that Barclays' profit after tax is down 46% to £3.5bn and profit attributable to shareholders is 62% lower at £3.6bn.

The difference between these numbers and the pre-tax ones Barclays chooses to highlight is that the one-off gain on the sale of BGI is reinstated as an after-tax item for 2009.

For what it's worth, these after tax numbers are not irrelevant (even if they don't tell you much about the performance of Barclays continuing operations), in that they determine the dividends Barclays can afford to pay and the annual addition to capital resources - which in turn determines how much Barclays can lend.

Now you might think Barclays' senior directors would want to talk to you directly about all this, and explain how they gauge progress.

But the bank has declined our requests to interview the chief executive Bob Diamond or the chairman Marcus Agius.

Some may think it is particularly surprising that Mr Agius chose not to do an interview, in that when he is not chairing Barclays he serves as the senior non-executive director of the ³ÉÈË¿ìÊÖ.

Had they consented to be interviewed, the questions I would most wish to put to them would be these:

1) Do they agree with the Bank of England that there is a significant implicit taxpayer subsidy for Barclays Capital - which takes the form of Barcap being able to borrow relatively cheaply because its creditors know that if the whole bank were to get into difficulties, it would be rescued by taxpayers?

2) If that taxpayer subsidy (or artificially lowered cost of finance) were eliminated, would Barclays Capital make any kind of a profit at all - in a globally competitive market, would it be able to increase what it charges for its products and services sufficiently?

3) Do they fear that reforms likely to be proposed by the Banking Commission set up by the Treasury will be aimed at eliminating that subsidy, by separating Barcap from Barclays' retail operations - probably by prescribing that Barcap should be re-constituted as a legally separate subsidiary, with a wholly independent balance sheet and capital that is utterly quarantined from the rest of Barclays?

4) If they come to fear that the viability of Barcap were threatened by the Commission's reforms, how would they respond?

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• - What's this?

Barclays says its headline profits are up 32% to £6.1bn and its underlying profits are 11% higher at £5.5bn.

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But these figures are calculated on the basis that , had never existed.

So some will argue that progress is in fact less strong - because in 2009 it reported headline profits before tax of £11.6bn, including the £6.3bn gain from the sale of BGI, and it trumpeted underlying profits of £5.6bn.

Although it is par for the course to strip out the surplus from disposals such as the BGI sale in assessing performance, it is curious that the £5.6bn figure for 2009 that it highlighted back then as capturing an essential truth about progress at the bank features nowhere this year.

That said, there is evidence of goodish recovery in 2010 at its retail bank in the UK, where profits were 39% higher at £989m, thanks largely to a sharp fall in the charge for bad debts.

The other highlight is Barclays Capital, where headline profits rose 94%, including the spurious impact of revaluing its own debt. On an underlying basis, pre-tax profit rose 2% to 4.4bn.

So what about the contentious issue of pay for Barclays Capital's 24,800 investment bankers?

Well Barclays says that the bonus pool is down from £2.9bn to £2.6bn (although again I am a bit confused by the 2009 number, because a year ago it told me that its bonus pool was £2.7bn, not £2.9bn).

In that sense, Barclays seems to have honoured its commitment to the Treasury in Project Merlin that it would reduce the total paid out in bonuses. And an apparently relieved Treasury put out the following statement:

"What is clear is that bonuses are down, and are lower as a result of Merlin, and that the banks are paying more tax this year than last year, due in part to the extra £800m bank levy announced last week."

However salaries at investment banks have been increased by around 40% over the past year. As a result pay, pensions and bonuses per head at Barclays Capital have risen 20% to £236,000 on average - which doesn't look too mean, at a time when most British people are suffering real cuts in their earnings as a result of inflation and low pay rises.

Barclays is paying a 2.5p final dividend, giving 5.5p for the year - which compares with 34p in 2007, the last of the boom years.

That massive drop in dividends explains why some big investment institutions are beginning to query whether Barclays and other banks have achieved the right balance between the rewards that go to staff and the rewards that go to shareholders (to be explicit, they would like more to go to them, and less to the bankers - although it is not clear what they will do to bring this about).

As for the other sensitive issue of how much credit Barclays is lending, its UK retail bank increased its loans and advances to customers by £12.6bn to £115.6bn - which will probably turn out to be one of the stronger lending performances reported by British banks.

But Barclays Corporate, which deals with middling size businesses, shrank its loans and advances by £5bn to £65.7bn.

Update 11:05: Barclays insists that salaries plus bonuses of its investment bankers at Barclays capital - what it calls their "comp" or compensation - is down. This certainly looks odd in view of their publised figures - which show that the average ratio of compensation to income rose from 33% to 43%, on average income per head that increased from £515,000 to £548,000.

Now that implies compensation of Barclays Capital's people rose from £170,000 to £236,000.

Now in my earlier note I gave a figure of £196,000 for 2009 comp per head, because that is what last year's release implied.

Anyway on the basis of published numbers, comp per head at Barcap rose either by 20% (what I said earlier) or by 39%.

Both of which look pretty impressive, at a time when the real incomes of most British people are being eroded by low wage rises and higher inflation.

Barclays claims however that its published numbers are misleading on this issue - which is a bit of a turn up, some might say.

So why is the reality for Barcap's investment bankers different from the published numbers? How is it that the implied increase in their pay is wrong?

Here is what a Barclays spokesman says:

"It includes prior year deferrals, changes in pension costs, the full-year effect of last year's salary increases which came through part way througt the year, a build out of Barcap, and a shift in business mix."

So now you know.

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• - What's this?

The government's new 66-page strategy document for its Big Society Bank and growing the so-called "social investment market", which has been published today, raises almost as many questions as it answers.

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And perhaps most importantly of all, it will act exclusively as a wholesaler. Or to put it another way, it will not put money directly into social enterprises, or businesses with some kind of social purpose, but will invest in funds and operations that in turn make the direct investments.

Think of it as the social banking equivalent of the sprat to catch a mackerel. It plans to help other investors raise significant sums to back social ventures by being perhaps the first to invest in their funds, or being prepared to provide the most risk-bearing slug of capital to these investors, the slug that takes the first loss, for example.

Also it won't have that much capital to play with, at least not initially. It expects to receive up to £100m in its first year of money from dormant bank accounts at UK banks and building societies, rising to £400m over some unspecified period (this is money that the likes of you and I have deposited at banks and have completely forgotten about).

As part of Project Merlin, it will receive around £200m of additional capital in the form of some kind of loan or investment from Royal Bank of Scotland, Barclays, HSBC and Lloyds. But apart from the fact that these banks expect to be rewarded for this money at commercial rates, it is not at all clear whether this finance will be in the form of some kind of subordinated debt or equity.

What we do know is that the £200m from the four banks will not be free. Which in turn means that the Big Society Bank will have to make some kind of meaningful return on the money it invests, in order to meet its aim of covering costs.

It is worth putting those resources into some kind of context. In year one, they will be equivalent to 0.02 of British GDP, so the Big Society Bank will indeed be a minnow or sprat compared with the whales of RBS, Barclays and HSBC whose balance sheets each exceed GDP.

But that may be the wrong comparison. Perhaps more important is that the social investment market is currently small: in 2010, total social investments in the UK were estimated at £200m. So a new bank with an initial balance sheet of £300m should make a difference.

To be absolutely clear, the Big Society Bank is not a charity. In fact, one of the things that is holding back its launch is that it needs state aid approval from the European Union, because it or the ventures it backs will be competing directly with commercial businesses and it could be seen to have an unfair advantage thanks to its access to the money in dormant bank accounts.

So here is where we get into the territory of things we don't know.

We have absolutely no idea what kind of interest rate the Big Society Bank will charge or what kind of dividend it will demand from those who take its finance.

We don't know whether it will have a preference for lending or taking equity stakes.

It is not clear what freedom it will have to expand its own balance sheet: it will be prohibited from taking deposits, but whether it will be allowed to issue bonds and raise additional wholesale finance is not specified.

And, perhaps most important of all, we don't really know what kind of social enterprises it will favour.

Will it try to back conventional businesses in areas of acute deprivation and strife, that have been all-but abandoned by mainstream banks and investors?

Or will it back ventures whose purpose is explicitly social, such as those providing advice and services to the very poorest?

Some will see it as a tool to help the government in its aim of dismantling the centralised state, by providing the capital needed by civil servants and officials to buy out their public services and turn them into employee partnerships and mutuals.

If much of the money did end up helping to turn parts of the public sector into John-Lewis-style employee-owned businesses, some would see that as a waste of the Big Society Bank's resources.

The Big Society Bank would not be creating new social enterprises in those instances. It would simply be helping to transfer the ownership of existing social enterprises - parts of the health service, social services, schools and so on - from the state or taxpayers to the staff or employees of those operations.

That transfer of ownership to staff might improve the efficiency of the relevant public services. But it is difficult to see it as creating incremental wealth, employment or opportunities for those abandoned by capitalism's mainstream institutions.

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• - What's this?

On Friday, when the attention of a few of us was on some interesting events in Egypt, the Department of Work and Pensions published a new so-called impact assessment of the costs for members of defined benefit pension schemes of the government's decision that many of these schemes should up-rate their benefits in line with lower CPI inflation, as opposed to RPI inflation.

I am not sure why they published a new assessment, since it was only in December that the last such evaluation was put out.

But the calculation may upset the millions of people affected by the changes, since it says that the effect of the move from RPI to CPI for protecting the value of future pensions is to reduce the value of their benefits over the next 15 years by £83bn - which is 8.4 per cent more than the £76.6bn December estimate of the erosion of their wealth.

This is how the DWP puts it: "The main cost of this policy is to members of private sector defined benefit pension schemes who will see the anticipated value of their pension rights reduced and the value of their total remuneration package reduced in the short term."

The value of this reduction in pension rights and total remuneration equates to a significant £5.7bn per annum.

And for 2m relevant active members of pension schemes, there is a reduction in their annual rate of pension accrual - which is broadly the same as a pay cut - of between £2,250 per year and £2,500 a year on average.

In other words, they will be up to £2,500 a year worse off right now, on average. That is the implied fall in their total remuneration, including the value of the pension promise made to them by their employer.

But they won't feel it till they retire - when their pensions will be up to 12 per cent lower than would otherwise have been the case (in real terms) in 2027 and 20 per cent lower in 2050.

The corollary of course of the pain for those saving for a pension in a defined benefit scheme is an £83bn windfall for the companies and other institutions which sponsor these schemes.

John Ralfe, the pensions expert, puts it like this: "this is a reduction in the value of pensions to pension scheme members and is a transfer from them to shareholders".

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• - What's this?

"It's now a three-horse race" said Nokia this morning, of its proposed "broad strategic partnership" with Microsoft "to build a new global ecosystem".

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If Nokia and Microsoft are going to continue to use phrases like "global ecosystem", some may argue that they may not win that race - since it's not clear that their millions of customers would have the faintest idea what they're talking about.

What they are actually doing is pooling technology and assets to make a meaningful impact on the smartphone market.

Nokia will deliver mapping, imaging and operator billing agreements to the partnership; Microsoft delivers the Windows Phone platform, the Bing search engine, and the adCentre search advertising services. They'll work together on marketing.

It is a merger in the fastest growing part of the consumer IT market, the part more-or-less defined by Apple with its iPhones and iPads - and where Google is now capturing the largest market share with its Android platform.

Hence Nokia's claim that the contest now has a troika of players - though RIM with its Blackberry would say it is still fighting.

I simply don't have the expertise to know whether the adoption of Microsoft's Windows Phone as its main "smartphone strategy" can deliver devices with the elegance and efficiency of rivals' products - and at the right price. My colleague Rory Cellan-Jones is better placed to discuss all that.

What I can say is that it is incredibly difficult to create a single enterprise with ruthless purpose when two giant businesses, with strong, proud respective cultures, decide to collaborate as equals. Typically if ground has to be made up fast in a competition, it helps to know who is actually in charge, who is holding the reins.

I am trying to remember a successful precedent of collaboration on this scale - involving businesses from different continents and with pretty different products and services - that worked, absent a formal takeover of one company by another, or a full-scale merger that created a unitary board and hierarchy.

Maybe it is a failure of memory or imagination, but I can't think of any encouraging precedent. Which of course doesn't mean that the deal will fail - just that globalisation and technological change has thrown up a new kind of deal, whose results are uncertain.

There is something rather awe-inspiring about the idea of two great beasts from different species trying to work together and have babies. If they succeed in procreating, and that's by no means certain, will the hybrid progeny be a stallion or some kind of hobbled, galumphing nag?

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The coalition government's programme for government includes an "aspiration" that a quarter of government contracts should be awarded to small and medium sized business.

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Now according to the report carried out for the Cabinet Office by Sir Philip Green on waste in government, what he called an "efficiency review", public sector procurement on IT, travel, consultancy and so on amounts to £166bn a year.

So if a quarter of this was channelled to small and medium sized businesses, that would amount to a colossal £41.5bn of turnover for them. Which, to use the ghastly management cliché, would be transformative.

To be clear, the programme for government isn't exactly clear on the definition of "government contracts", so I am not sure whether the aspiration applies to the whole £166bn.

I asked the Cabinet Office how much government business would become available for smaller businesses. This is what an official said:

"We don't have accurate data to show the current value of spend with small companies, but we can say for certain that moving towards 25% of government contracts being awarded to SMEs will open up billions of pounds worth of contracts to these companies.

"And to make sure the government can be held to account, every department will publish accurate data by April which can be used to measure progress."

The Minister for the Cabinet Office, Francis Maude, seems pretty fired up about it all. He complains that there is a "procurement oligopoly, where innovative small businesses and organisations are too often shut out of contract processes early on because of ridiculous rules and unnecessary bureaucracy".

He describes the dominance of big companies in supplying government as not only bad for small businesses but "bad for government as it stifles competition".

So what is he actually proposing to do to break the big company oligopoly?

Well later today he will announce three reforms which may make something of a difference - and which are a response to a large number of the .

The changes all relate to the forms which businesses have to fill in, a so-called pre qualification questionnaire or PQQ.

Small businesses hate these because they are time-consuming and onerous to complete. And some of the stipulations in these questionnaires - for certain levels of indemnity insurance, for example - are simply too expensive for the small businesses to take out, unless and until they win the contract. But they are not allowed to bid for the contract unless they've already met these legal and financial conditions (a classic bureaucratic Catch 22, which delivers enormous advantages to big incumbent providers of goods and services).

So for central government procurement worth less than £100,000, PQQs will be abolished altogether - allowing government purchasers much more freedom to determine the most efficient way of buying stuff.

If this, for example, were to end the practice highlighted by Philip Green of civil servants paying £2000 for laptops that can be bought commercially online for £500, all taxpayers should cheer.

The second reform is create a central database of PQQs, so that for so-called commodity goods and services, a supplier would only have to fill in a PQQ once and forever, rather than having to submit a new PQQ for every single government tender.

Finally, there will be moves towards more open bidding procedures in general, giving government purchasers more flexibility to talk to a range of potential suppliers - small and big - about what they can offer, without eliminating all the small suppliers right at the outset because of the financial and legal hurdles imposed by too-rigid PQQs.

It all sounds a bit like common sense - although whether it will lead to the kind of cultural and commercial revolution desired by Francis Maude cannot be taken for granted.

Apart from anything else, it will work only if the civil servants involved in procurement become comfortable taking greater personal responsibility for their purchases. Because the great advantage for bureaucrats of PQQs is they automate the decision-making process to a large extent, by screening out all sorts of small, young, interesting businesses with little track record.

So if the government really wants to deliver contracts to smaller businesses, it is going to have to somehow persuade civil servants to be more comfortable taking risks and exercise personal judgement when awarding contracts. Which won't happen overnight.

One final thought. Mr Maude has already squeezed the profit margins of many of the big companies which supply government by renegotiating their contract terms. Those companies have persuaded themselves that the pain is worth it, because of the potential growth promised by the government in outsourcing and privatisation of public-sector services.

But if much of these new contracts go to smaller companies, then perhaps there isn't a Con-LibDem silver lining after all for the likes of Serco, Capita and the rest.

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This is an interview I did for the ³ÉÈË¿ìÊÖ's College of Journalism on how and why I blog. It is probably of more interest to my Mum than to anyone else. But if you have an incredibly idle five minutes, it might be less painful than sticking pins in your eyes.

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When I started in journalism in the early 1980s, few institutions were regarded as being as important as national stock exchanges.

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They were protected monopolies regarded as vital to the functioning of national economies. The chairman of what was then in an imperial way simply called the Stock Exchange (because London's market did not need to bother with any kind of explicit identifier of its nationality) was perceived to be almost as important as the governor of the Bank of England or the chancellor.

In 1982, before I became a hack, I had a short stint as what was then called a Blue Button (a trainee) on the floor of the Exchange, before it all dematerialised into cyberspace. Even then, there were still plenty of top hats, bowlers, eccentric etiquette and a rigid hierarchy on stark display.

The Exchange - which later acquired humility and became the London Stock Exchange - was pretty incompetent and inefficient in a way that is typical of businesses insulated from competition. Owned by its broking and jobbing customers (they were its members), it was also perniciously riddled with conflicts of interest.

Today the London Stock Exchange is just another business listed on its own market and owned by ordinary shareholders (well some of them, like the Dubai Borse and the Qatar Investment Authority, aren't so ordinary in the LSE's case - but you take my point).

What it does - providing a liquid market for investors, and the souk in which companies can raise vital capital by selling new shares to those investors - remains essential to Britain's prosperity. It matters that investment institutions can trade in and out of shares efficiently and cheaply. It matters that global companies think the UK is a decent place to be based, because it is the home of a wide and deep capital market.

But the LSE is not the only operation providing these essential financial services in the UK any longer, because of globalisation, deregulation and technological change.

National barriers insulating the older exchanges have been eroded. And there is also intense competition confronting these older exchanges from new electronic markets, with bizarre names like Chi-X Europe and Bats Europe.

So to survive, the LSE has been frantically trying to improve its own efficiency and drive down its costs. A new trading and information system, Millennium Exchange, goes live for the UK cash market (as opposed to futures and derivatives markets) in just a few weeks.

There is something else that businesses typically do, when confronted with intense competitive pressures in markets that are being progressively enlarged and liberalised: they merge.

In the last 24 hours we have had the extraordinary spectacle of the London Stock Exchange announcing a merger with TMX Group, operator of Canada's largest stock market, and of Deutsche Boerse disclosing it is in advanced merger talks with NYSE Euronext (a business that already combines New York' bourse with assorted European markets).

When I spoke to Chris Gibson-Smith, of the London Stock Exchange, early yesterday, he was hailing the creation of a transatlantic business that would boast more listed companies than any other by a wide margin. And it would have a particular dominance in providing a market for the shares of mining companies.

Within hours that particular advantage no longer looked quite so unimpeachable - as NYSE Euronext and Deutsche Boerse showed their hand. In terms of market value, LSE/TMX may end up looking like something of a tiddler, worth less than a third of NYSE Euronext Deutsche's combined £15bn odd.

Now if you're a customer of these exchanges - either a company listing shares and raising capital or an investor who wants to trade - you might be concerned that this consolidation, these mergers, may not be in your interest. You may fear that new global monopolies are being created, that will have the ability to charge you more than a fair price.

In the shorter term, there may be something to that anxiety, especially as these are network utilities where scale delivers massive advantages.

But barriers to entry do seem so extraordinarily low, and the exchanges' customers - such as the giant investment banks and the trading addicts at hedge funds - do seem extraordinarily price sensitive (one reason why bankers' bonuses and hedge fund managers' rewards remain so high?).

Which means that any attempt by the new merged beasts to extract too much profit would probably be met with the fairly rapid creation of new trading networks.

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Here are the main details of the long-awaited Project Merlin deal between the government and the Treasury.

1) As expected, the four biggest British banks (RBS, HSBC. Lloyds and Barclays) plus Santander will commit to make available £190bn of credit to business in 2011, up from £179bn in 2010. On the question of whether the funds being made available for business will actually be lent, the Treasury points out that in 2010 RBS and Lloyds lent more than they promised to do - so the Treasury is hopeful that bankers will again exceed the targets.

2) Of this lending commitment, £76bn will be made available for smaller businesses, which represents an increase of £10bn or 15% in credit available to SMEs in 2010. This is probably the most important commitment in Merlin, in that it is small businesses that have been complaining of being starved of vital finance.

3) The Bank of England will monitor whether the funds are being made available to businesses and will publish quarterly assessments.

4) Among the performance targets used to determine bonuses of bank chief executives will be whether they are providing the promised credit to business (this in broad terms is already the case for Stephen Hester at RBS and Antonia Horta Orsorio at Lloyds).

5) The chairmen of banks' remuneration committees are writing to the chairman of the Financial Services Authority warranting that they are cutting the amount provided for bonuses in relation to 2010 performance as a direct consequence of their negotiations with ministers.

6) In their coming results, RBS, HSBC, Lloyds and Barclays (known as the Merlin banks) will publish the pay of their five highest paid executives below board level (but not the pay of traders who don't have management responsibility). The pay of board members already has to be disclosed.

7) The government will legislate so that from 2012 all big banks in the UK will be forced to publish the pay of their board members plus the eight highest paid executives below board level. This new disclosure requirement will apply to the UK operations of overseas banks such as Goldman Sachs and UBS. Goldman is unlikely to like this. On paper at least, the UK will have the most transparent regime for bankers' remuneration in the world.

8) The remuneration committees of big British banks will commit that they will henceforth sign off the pay of the ten highest paid individuals in each business division. This is designed to make it easier for shareholders to hold the banks to account for what they pay.

9) The banks are providing £200m of capital for David Cameron's cherished Big Society Bank, which is supposed to finance community projects.

10) The banks are providing £1bn of equity capital (or risk capital) over three years for small businesses in hard-pressed parts of the UK, on top of the £1.5bn of equity capital they have pledged over ten years (ministers insist this £1bn is additional capital; bankers in recent days have been less clear about that). This is supposed to help fill what is traditionally known as the "equity gap" for smaller growth businesses in the UK (Germany's competitive advantage over the UK has long been seen in terms of how its smaller businesses find it easier to obtain long term finance). And the equity capital will in theory be directed to the private sector in regions most hurt by public spending cuts.

Those are the main points of detail. In addition, we will also learn more about the pay and bonuses being awarded to senior people at the two banks where taxpayers have huge stakes, Lloyds and Royal Bank of Scotland. They will repeat their 2010 commitment that the cash element of any bonus won't exceed £2,000 (bonuses paid in shares will of course run to many millions of pounds in some cases).

Note that Santander has signed up only for the lending. It has not signed up for the other Merlin commitments.

PS. Just to confirm, the provision of credit to businesses big and small will be on commercial terms, and will be subject to demand. So, many small businesses will probably continue to complain that even when credit is offered, it is too expensive.

Update 13:08: George Osborne has formally ruled out imposing a bonus tax - rejecting demand from Labour for the previous government's bonus tax to be imposed again.

Update 14:19: Royal Bank of Scotland has confirmed that its chief executive, Stephen Hester, will receive a "new Share Bank scheme" award (RBS's name for a bonus) of £2.04m for his performance in 2010. It will be paid in shares, and he won't be able to get his hand on all of it for three years.

It means that Hester will receive a fraction of the sum likely to be awarded to his opposite number at Barclays, Bob Diamond (with some of the difference in their respective pay explained by the fact that RBS is more than 80% owned by taxpayers).

RBS also confirms that its investment bankers - employed by its GBM division - will share in bonuses totalling "less than £950m for 2010." That compares with the 2009 bonus pool of £1.3bn. A proportion of that drop in bonuses stems from the fact that GBM had a better year in 2009: not all of the fall represents pay restraint imposed by the board of RBS as a result of the Merlin talks.

, on the basis of this size of bonus pool, at least 200 RBS bankers are expected to receive bonuses in excess of £1m each.

Update 15:00: Is it a good day for banks to bury bad news? Like RBS, Lloyds has disclosed the bonus of its chief executive, Eric Daniels.

Mr Daniels (who is stepping down as chief executive) is to receive a 2010 bonus of £1.45m - which Lloyds says is "62.3 per cent of his potential opportunity" (ie the board could have awarded him more). I disclosed some weeks ago that Mr Daniels was on course to get a bonus.

Like Mr Hester, Mr Daniels waived his bonus in the previous year.

Mr Daniels' bonus is likely to prove more controversial than Mr Hester's - in that Mr Hester was appointed at RBS at the end of 2008 to clean up the mess created by his predecessors, whereas many would argue that Mr Daniels was to a large extent responsible for the mess at Lloyds, because he was the boss when Lloyds made its disastrous takeover of HBOS (also at the end of 2008).

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Labour leaders and Labour prime ministers have since time immemorial (well almost) taken millions of pounds of funding on behalf of their party from trade unions, and devoted a considerable slug of their waking hours to telling the world that these trade unions are not bossing Labour policies.

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Tony Blair, as prime minister, made it something of a personal speciality to take trade union money with one hand and to sock trade union leaders in the moosh with his other. But that never stopped the Tory Party accusing him and his successors of being in hock to the brothers.

So it probably won't be especially easy for David Cameron to bat away as irrelevant the of the extent to which Conservative Party Central Office has become dependent on cash donations from companies and individuals working in financial services.

The trends are striking: in 2005, the financial services industry contributed 25% of Central Office cash donations; that had risen to 52% in 2009 before falling back to 51%.

It is probably worth overlaying on to the funding statistics separate research on the number of Tory MPs who have worked in the City and financial services. According to , 134 of 498 Tory MPs and peers were or are employed in the financial sector - which includes 70 MPs.

The question, which of course arises, is whether this gives the Tory Party and Tory Members of Parliament a deep and useful insight into one of the UK's most important industries. Or whether it biases the Conservative members of the government to favour this industry in a way that is unhealthy for the country as a whole.

If you were going to give the Tories the benefit of the doubt, you would refer to the performance of the former Barclays banker Andrea Leadsom as a Conservative member of the Treasury Select Committee. When the committee grilled Barclays' chief executive Bob Diamond last month, Andrea Leadsom was one of his more acute and merciless interrogators.

Those however who wish to see conspiracies will point out that for all ministers' tough talk about curbing bankers' bonuses, what will emerge as and when Project Merlin is formally announced is promise of restraint but the reality of millions of pounds being awarded to thousands of top bankers.

It should be pointed out, however, that the simplest conspiracies won't fly: the bulk of funding for the Tory party doesn't come from bankers; arguably the most important group of Tory donors are hedge fund managers, some of whom would be seen as critics rather than allies of the big banks.

Even so, when a party becomes as dependent as the Tory Party has apparently become on a group of individuals and institutions with a number of identifiable collective interests - their shared concern about the impact of European financial services directives would spring to mind - it becomes more of a challenge for a prime minister to demonstrate that he is governing for all.

If Mr Cameron has any doubt about the irksomeness of that challenge, he need only ask the advice of Mr Blair.

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The chairmen and chief executives of the UK's big four banking groups are livid that an additional £800m levy has been imposed on their banks (see my earlier post).

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According to sources, the chief executives of HSBC, Barclays, Royal Bank of Scotland and Lloyds will have a conference call this afternoon, to decide whether to press ahead with Project Merlin, the lending and bonuses deal under discussion with ministers, or whether to "throw their toys out of the pram" (in the words of a banker).

"We have been negotiating with the Treasury in good faith, on the assumption that the Chancellor would not spring nasty surprises like this on us," said a banker. "We had no idea this was coming and quite frankly some of us are livid."

The question the bank bosses will discuss this afternoon is whether it remains sensible to sign up to Project Merlin, if they can't be certain that the government will resist the temptation to periodically bash them when the political heat is on.

"The whole point of Project Merlin was to reach an accommodation with ministers, to end bank bashing," said a banker. "Is there any point for us of doing Merlin if it begins with what some of us would see as betrayal?"

The government remains hopeful that Project Merlin will still be signed. An official said it was impossible to give the banks advance warning of the tax rise for legal reasons.

If it is signed, Project Merlin with involve the banks promising to make available £190bn of credit for businesses, supporting the government's so-called Big Society Bank, providing equity finance for medium size businesses in economically disadvantaged parts of the country, and showing restraint in bonus payments.

A senior banker said "this feels a bit like the last soldier killed before the armistice - if there is an armistice."

UPDATE 18:38

Toys still in pram.

The read-out I’ve had of the bank chief executives' conference call is there is a will to press on with Project Merlin, in spite of their noses being put out of joint by the levy increase.Ìý

However the formal announcement of the Merlin deal is unlikely to be tomorrow – though it could come on Thursday.

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Could it be "no more Mr Nice Chancellor," at least as far as the banks are concerned?

George Osborne had originally announced that the government's new bank levy would be phased in, with a lower rate applicable in 2011.

No longer.

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The Chancellor has concluded that the banks are in better shape than he thought less than two months ago, when he announced that a smaller levy would apply in the current year. He has therefore decided that the full levy will be imposed with immediate effect, to extract the £2.5bn per annum which he expected to be the long term yield.

The effect of this is to raise £800m more from the banks in 2011 than the Treasury had been planning to do. Royal Bank of Scotland, as just one example, will pay around £150m more levy than it had been expecting (or £473m in total, up from £315m).

Here's the technical detail.

The levy applies to banks' short-term wholesale finance, the money they borrow for short periods from other financial institutions, big companies and very wealthy individuals, and also to uninsured retail deposits

In December the Chancellor announced that the levy would be at 0.075% - and half that for uninsured retail deposits. For the first year only, a 0.05% rate would apply.

That starter rate has now been scrapped. All banks will pay 0.075% from now on.

Except that there's a wrinkle, which complicates matters.

For the first two months since the tax was introduced on January 1, the banks have been paying the 0.05%. And since the Chancellor now regards that rate as too low, he will for March and April levy the tax at 0.1% to recoup the money lost, before lowering it to 0.075%.

If you're confused, probably all you need to know is that this messing around with the 2011 rate is designed to generate £2.5bn of revenue for the Exchequer this year, up from the £1.7bn originally expected.

Which is a useful bit of additional revenue, but the £800m increment is a rounding error in respect of the ballooning national debt and would shave considerably less than 0.1 percentage points off the UK's 10 per cent annual fiscal deficit.

In other words, the tax rise is probably of more importance from a symbolic point of view - perhaps indicating a touch more iciness in ministers' attitudes to the banks - rather than from a budgetary perspective.

After 2011, the expected take from the tax will remain as before: £2.5bn for 2012 and then £2.6bn in 2013 and 2014.

So does the official explanation of the imposition of the full levy stack up? Are the banks really significantly stronger than they were in December, and therefore better able to pay more tax?

Well perhaps not. But perhaps it is understandable that the Chancellor thinks they are in ruder health, given that ministers' pleas for banks to show pay restraint is not preventing them from handing out around £6bn in bonuses to their investment bankers.

Increasing the 2011 take from the levy also helps Mr Osborne respond to the charge from Labour frontbenchers that he is being softer on bonuses than they would be, in that Labour says it would repeat for one more year the special bonus tax which applied last year.

By way of context, the additional £800m of levy for 2011 equates to around 13 per cent of the aggregated value of the big banks' bonuses.

That said, for Mr Osborne and the Business Secretary, Vince Cable, the increased levy is only one element in a raft of initiatives to reach what Mr Osborne calls a "settlement" with the banks.

These initiatives go by the name of Project Merlin, and they include pledges from the banks to make £190bn of credit available to businesses in 2011 (see my post of yesterday for more on this).

Project Merlin is also likely to include a stipulation that banks should disclose the pay and bonuses of their eight or so most important executives below board level (board members' pay is already disclosed) - so that bank shareholders have more relevant information to make a judgement about whether top bankers' pay is excessive.

This increased pay transparency from banks is of particular importance to Vince Cable: he was not happy that the Treasury recently dropped plans drawn up by the last government to force banks to disclose how many of their staff are earning sums of £500,000, £1m, £1.5m, £2m, and so on.

I am told Mr Cable is pressing for the banks to reveal the pay details of the maximum number of senior staff consistent with not putting them at a significant commercial disadvantage in relation to US banks (which already have to publish most of this information).

So long as Mr Cable's concerns can be met, say government sources, Project Merlin could be announced as soon as Wednesday.

Update 08:20: By the way, there seems to be something of a disagreement between the banks and the government about the significance of £1.3bn in equity finance or investment capital which the banks say they'll provide to smaller and medium size businesses.

The question is whether this is really new, additional money for small businesses.

that, as part of Project Merlin, this equity finance will be provided to businesses in parts of the UK most hurt by public spending cuts - and describes the funding as a victory for the deputy prime minister Nick Clegg, the business secretary Vince Cable and the LibDem wing of the coalition.

Now it is true that banks are providing this equity finance. And it is also true that this £1.3bn is on top of the £1.5bn Business Growth Fund which the banks announced in the autumn.

However one banker told me that his bank awould support the business secretary's regional growth initiatives as "part of the normal course of business, ie in each region we will work with the agencies".

In other words, his bank would have provided this money anyway, through its regional funds, irrespective of whether it was labelled as part of Project Merlin.

Update 08:55: It is unusual for chancellors to make tax announcements outside of the yearly budget.

It is particularly unusual for such a tax announcement to raise only £800m in a single year – which is not enough to have a meaningful impact on the UK’s budget deficit.

But, as I have mentioned, George Osborne’s decision to force the banks to pay the full rate of bank levy with immediate effect probably isn’t all about mending the public finances.

Many would say that he is being motivated in part by the politics of being seen to be extracting more money from banks just as they’re about to announce controversial bonuses for their top people of perhaps £6bn in total – which is seven and a half times the additional tax being raised.

Somehow I doubt that the new shadow chancellor Ed Balls will say that Mr Osborne is raising enough. But Mr Balls may have to explain why the previous government, in which he was a cabinet minister (though not chancellor) did not take steps to force through permanent reductions in bankers’ bonuses at the moment when it had maximum leverage over the banks – when it was rescuing the entire banking industry in the autumn of 2008.

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Is there a genuine middle position between allowing market forces to determine how much is lent to businesses - more-or-less the current position which is widely seen to be depriving small companies of vital finance - and nationalising the process of providing credit?

The government hopes and believes there is such a "third way", to use an arguably tarnished term beloved of a recent prime minister.

The search for this third way has been in progress for the 10 weeks or so of negotiations between the Treasury and the UK's four biggest banks, Barclays, RBS, HSBC and Lloyds.

Ministers want banks to commit to a "responsible" approach to bonuses (in the words of a banker - he was unable to tell me what "responsibility" as applied to bonuses might mean although it doesn't mean "small") and to increase the credit the banks make available to support economic recovery.

If the Tory and Lib Dem members of the government can reconcile their differences about what they want and expect from the banks, an announcement of what George Osborne calls a "settlement" with them - and which also goes by the nickname of Project Merlin - could come in the coming week.

What would it mean in practice for these banks to "promise" to lend £190bn odd to small and big companies in 2011 (which is broadly what I expect)?

Well there's a hard version of such a promise and soft version.

The hard version - which is that the banks would pledge to actually lend that sum - is not going to happen.

The reason is that the banks' independent shareholders would not tolerate the banks lending to businesses that could not afford to repay the money.

Even taxpayers - who own a huge slug of RBS and Lloyds shares - might feel queasy at the thought that the banks were lending merely in order to hit quantitative targets, rather than to generate profits.

To lend only because they've been told by ministers to do so, and irrespective of the risks, would be to throw money away - something the banks did all too brilliantly in the run up to the Great Crash of 2008, even when they weren't being urged by ministers to lend more.

So if the chancellor wanted the £190bn injected into businesses, regardless of any judgement of credit-worthiness, he would have to nationalise all of RBS, Lloyds, Barclays and HSBC - which is not going to happen.

The banks are therefore making a soft promise: they will lend the £190bn only if it makes commercial sense to do so, if there is demand for the money from businesses able to make a convincing case to the banks that they can pay the money back.

Banks will make the £190bn available, but actual lending will be subject to "commercial terms": banks will retain discretion to judge whether applicants for loans are a good or bad bet.

Now, it's not immediately clear how that is different, in a fundamental sense, from what the banks are doing right now.

Maybe this is a test of the behavioural economics favoured by the Tory part of the coalition, of the idea that somehow banks' behaviour will be different if they are told to stand at the front of the class, admit their sins and promise to do differently in the future.

However some critics of the banks will fear that actual lending to businesses, especially to smaller businesses, will continue to shrink, as it has done for the past couple of years - because banks have swung too far from recklessness in their lending decisions to cautiousness.

That fear will be reinforced by the fact that the £190bn of commitments will be a gross figure, not a figure for how much banks' balance sheets should actually expand.

Or to put it another way, if banks were to force repayment of loans from some businesses for whatever reason (good or bad), that contraction of the amount of credit provided to the economy would be ignored in assessing whether they had honoured their lending promises.

That said, ministers know that they can't coerce banks to lend. So they are engaging in a second bit of behavioural economics: they are trying to nudge them to lend more, by getting them to strengthen the link between future bonuses and the provision of credit.

But, again, this will be a soft link between pay and lending, whose impact may be limited - because a hard mechanistic link would be viewed by shareholders and old-school bankers as insane.

As it happens, Stephen Hester, chief executive of RBS, has always had in his contract that the bank has to demonstrate lending availability - which is a million miles from rewarding him for actually lending money. And Antonio Horta-Osorio has a similar provision in his contract as new chief executive of Lloyds.

What ministers hope is that if RBS or Lloyds, for example, were to renew and perhaps strengthen the promise to make a specified volume of credit available and then failed to provide loans of that magnitude, the relevant chief executive would have to explain why the loans had not gone out of the door to the bank's remuneration committee in order to avoid a pay sanction.

But just how likely is it that non-executives on the remuneration committee would contradict a chief executive's claim that credit-worthy borrowers could not be found? If the chief executive said that more lending would have generated more losses for the bank, would the non-executives really wish to punish that chief executive for displaying the great bankers' virtue of prudence?

Look at all this another way.

Paying Hester, Horta-Osoria and their other peers bigger bonuses for actually pumping out credit, as opposed to just making it available, would be a bit rum. Such a pay policy would look a lot like the madness of the bubble years - when too many bankers became multi-millionaires for lending without due regard to the risks, and the rest of us were handed the bill.

Update 09:55: A government source insists that the status quo on bank lending will be changed in a fundamental respect. If banks henceforth cite "lack of demand" for a failure to provide the £190bn of loans, that "excuse" would be rejected by the chancellor and business secretary.

Which certainly increases the pressure on banks to lend to business. But it doesn't deal with the problem that banks' assessment of the credit-worthiness of borrowers is subjective - and there will remain plenty of scope for banks to reject borrowing applications from businesses that the chancellor and business secretary may wish were supported.

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Here is the deputy prime minister, Nick Clegg, laying out the scale of economic challenge faced by the government:

"The model of economic growth fuelled by debt and based on financial services is broken for good."

If you are a banker, you might say yikes - because it rather implies that Mr Clegg is determined to cut the banks down to size, irrespective of warnings of the sort issued today by the CBI that breaking up the banks would be seen as damaging to the interests of the businesses it represents (for what it's worth, many smaller companies tell me they would love to see the megabanks dismantled).

We'll see whether the senior partners in the coalition, the Tories, are quite so gung ho to reconstruct the banking industry.

Do they wish to call the bluff of the banks who warn that their ability to finance the recovery would be undermined and that there would be a permanent loss of the third of Britain's growth routinely provided by financial services till it all went pop in 2007-8?

We'll see.

That said, Mr Clegg's bigger point is that the UK needs a whole new model of economic growth.

So what exactly was the post-Thatcher model which characterised most of the period in office of New Labour? Here were its main elements:

1) a massive explosion of household debt, from 100% of disposable income to an unsustainable 180% of disposable income - a borrowing binge that fuelled rapid and unsustainable consumer spending.

2) Public spending that grew faster than the growth rate of the economy as a whole.

3) Productivity improvements driven by a massive influx of cheap labour, especially from the newer East European members of the EU.

4) A promise by the last government to overseas multinationals that they could buy more-or-less whatever assets or businesses they wanted in the UK.

5) A promise to multinationals that there would not be significant immigration obstacles put in the way of their ability to employ whom they like and when they like in the UK.

6) A pledge to multinationals that congestion at the Heathrow airport transport hub would be reduced.

7) A promise to the City that the regulatory environment for hedge funds and private equity would be as light touch and unintrusive as anywhere in the world.

8) A promise to those on highest earnings that the marginal rate of tax on income and capital gains would be as low or lower than in any other substantial developed economy.

Now partly as a result of the Great Crash of 2008, partly as a result of the general election of last year, partly as a result of public opinion, almost all of these pillars of the old economic model have been demolished or seriously damaged.

Households typically know they have borrowed too much and are reining in their spending.

We all know what's happening to public spending.

Incremental immigration has reduced.

Multinationals can probably still buy what they want in the UK, but their freedom to operate here has been restricted - so their desire to invest has on the margin been reduced (Pfizer says its decision to close down its UK research centre should not be seen as de facto criticism of the business environment in the UK - but it wasn't exactly an endorsement).

A combination of an FSA determined to be a more intrusive regulator, and a growing EU ambition to write rules for every nook and cranny of financial services in the EU, means that London cannot claim to be a place where hedge funds, for example, can any longer frolic with gay abandon.

As for tax, forget the government's plans to cut the corporation tax rate. What obsesses (and I choose my words carefully) those who run larger businesses is the 52% marginal rate of income tax for those on high earnings (a 50% top rate of income tax plus 2% National Insurance).

Now there may be good social and economic reasons to replace those pillars of the economy with new ones - which might be more solid, and which might ensure that more of the fruits of growth go to more people (rather than being scoffed by the top 0.01% of earners).

That said, if the Labour leader Ed Miliband is right to warn that the so-called British promise to the next generation that they'll be better off than us could well be broken, that's probably because it is quite hard to discern how and when the new model of the British economy will be built.

Mr Clegg talks about the imperative of investing more - in infrastructure, in new greener technologies, in education and skills. And he wants the engine of growth to be a national engine, not a London and South East engine.

Few perhaps would disagree with these aspirations.

But when I talk to those who run out biggest companies, I don't hear defeatism, but I do hear reluctance to make substantial investments at a time when the outlook is so uncertain.

This matters for the UK's long term prosperity and for the short term - in that most forecasts of sustained economic recovery in the UK are predicated in part on a substantial enduring rise in private sector investment.

So, for example, the independent Office for Budget Responsibility forecasts that business investment will rise by 8.6% this year, 8.4% in 2012, 10.2% in 2013 and 9.8% in 2014.

By recent standards, these would be big increases. And maybe they are achievable.

But many smaller companies complain that they simply can't get the credit for investment from the banks that they want and need.

And although some big businesses in manufacturing are making substantial commitments to the UK (in automotive production for example), I can't help but wonder - from my conversations with FTSE bosses - whether we can count on business investment rising at around 10% per annum for the foreseeable future.

Reducing the public sector's deficit and demonstrating that the UK isn't bust may well be necessary to engineer a revival of private-sector investment in the UK (which would be conceded by government and opposition, even if they disagree on the timetable for deficit reduction).

But as Mr Clegg concedes, deficit reduction on its own won't make the UK the natural recipient of multinationals' capital, at a time when they can take their expertise and money anywhere in a financially borderless world.

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Vodafone in its modern, multinational form was to a large extent created by Sir Chris Gent, an ambitious Brit who went on a takeover spree around a decade ago.

Whether or not that takeover spree was good for shareholders or for the UK is an argument for another day.

But it is striking that with the appointment today of Gerard Kleisterlee as its chairman, Vodafone - the UK's second biggest company - is now chaired by a Dutchman and run by an Italian, Vittorio Colao.

For the UK's biggest multinational companies, it is now a clear trend for Brits to be in the minority in the most senior positions.

Including Vodafone, four of the five biggest British businesses by market value don't have a Brit as either chairman or chief executive: BP is run by a Swede and an American; Rio Tinto by a South African and an American; and Shell by a Finn and a Swiss national.

Only HSBC, of that top five, has Brits at the top.

What's going on?

Well some would say that these companies aren't really British any longer in anything but a formal, legalistic sense - in that their assets are all over the world, and the UK is often not their biggest market.

On that view, Britishness of these companies is a quaint accident of history. And you would expect such international institutions to be managed by citizens from many different countries.

But here's the thing. If you look at American multinationals, or French multinationals, Dutch Multinationals, or German multinationals, Indian multinationals, or Swedish multinationals, you see lots of Americans, French, Dutch, Germans, Indians and Swedes at the helm.

You see them at the helm of businesses from their own respective countries. And you see them running companies that are headquartered half a world away from where they were born.

However you don't see that many Brits in the ascendant at non-British companies or - increasingly - at British companies.

Why is that?

Well that apparently endangered species, the British chairman of a British FTSE100 company told me he thinks it's a work-life balance thing: he claims that we Brits prefer the quiet life at home, rather than the thrills of living on a plane and consorting with prime ministers and the rest of the global elite.

Maybe.

Or maybe it's just another manifestation of the relative openness of the British economy and the UK's unusual cultural tolerance.

Does it matter that the big bosses aren't from the UK?

Well it might, on the margin, have an impact on where these companies choose to invest.

And if you think these companies are global powerhouses, there is a question about whether British interests are sufficiently represented when corporate bosses flex their political and economic muscles.

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Pfizer's closure of its research centre in the UK is one of those gut-wrenching stories.

Apart from the blow to more than 2,000 employees, many of them highly skilled, it is another setback to the task of rebuilding the British economy on foundations of expertise and competitive advantage in several sectors - and, to over-simplify the perceived British problem, not just on financial services and the City.

Actually, British dependence on the City is typically overstated. It's true that in the decade of boom years to 2007, financial services provided a disproportionate contribution to the growth of GDP - up to a third of growth in individual years.

But the City's share of the total economy or value added is probably not more than 10 to 12% - and the City probably remains smaller than manufacturing (which, of course, is currently performing better than for decades).

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There is another issue. When critics denigrate the City, they often do so because they equate it with the giant banks - because they see these banks as having taken huge risks to generate giant bonuses for their executives, risks that turned out to have been underwritten by taxpayers and risks that went bad at a cost to the entire British economy.

So there is a passionate debate - focussed on the Independent Banking Commission set up by the Treasury - to try to reconfigure banking so that the risks taken by banks rest exclusively with their creditors, investors and employees, and not with the rest of us.

Goodness only knows whether the hope that banks can be turned into ordinary mortal businesses is a hopelessly naive one.

But if you happen to think that giant, too-big-to-fail banks are a bad thing, it is probably as well to point out that they are not the entire City. I have been reminded of that important little fact by brand new research commissioned by a bunch of asset managers, who are gathered together as the New City Initiative and are fed up with being tarred with the mega-bank brush.

The research by IMAS Corporate Advisers trawled through the register of the Financial Services Authority and returns at Companies House. It estimates that small and medium size businesses in financial services, or businesses with up to 250 staff each, employ a minimum of 350,000 people and up to 560,000 people in the UK.

That is a fair number of people. It is equivalent to the number expected to be made redundant by the government's public spending cuts. And it suggests that the SME financial sector contributes more to UK employment than education, than energy and mining, than agriculture, forestry and fishing, inter alia.

While you might not believe that everything that these small financial firms is socially useful (not all of you, I know, are cheerleaders for hedge funds), and while you might think that some innovation by financial firms is fatuous at best, it is as well to recognise that SME financial services represent a rare and important pocket of excellence in the UK economy.

These smaller firms, especially those in asset management, showed far greater resilience since the crash of 2008 than the big banks. And although smaller financial firms are even more dominated by men than bigger firms (the City remains astonishingly long of testosterone), FSA data shows that female employment in these smaller firms has been rising since the downturn, whereas it has been falling in big financial institutions.

So when the New City Initiative pleads that ministers should take care not to crush these smaller firms with new rules and regulations, especially diktats from the European Union, it may well be a voice that deserves attention.

Because here's the big simple point. None of the half a million-odd people in this sector are in firms that - unlike the big banks - are implicitly or explicitly subsidised by taxpayers. None of them are in firms that would need to be rescued by taxpayers if their bets went wrong. They do not represent a direct risk to the stability of the financial system.

So they are probably not a problem that needs to be solved - rather they are a relative success for the UK.

So if they fear that their vitals will be squeezed by new directives and codes designed to sanitise the banks, perhaps we should listen. If the banks are the bathwater, these smaller firms may well be the baby which it would be injudicious to throw out.

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If you , you'll get to the famous New York Times expose of phone hacking by the News of the World.

On this web page, four paragraphs down on the left hand side, there is a link to a tape recording of a conversation between the private detective, Glenn Mulcaire (who was jailed for his role in attempting to access the voicemail of royal aides) and an unidentified journalist.

The conversation is pretty extraordinary. In it, Mr Mulcaire gives detailed instructions to the journalist about how to hack into the mobile phone of Gordon Taylor, chief executive of the Professional Footballers' Association, so that the journalist can listen to "three messages from Tottenham" (the North London football club).

Now there has been some interest in the identity of the journalist - and, in particular, where the journalist was working at the time.

A while back, the Independent suggested that the journalist may have been working at the Evening Standard when the conversation took place. That is the case.

At the time of the phone call with Mr Mulcaire, the journalist was working for the Evening Standard, which was then owned by Daily Mail and General Trust (and is now owned by the Russian billionaire, Alexander Lebedev).Ìý

So to state the blooming obvious, the tape recording suggests that journalists outside of the News of the World and News International - which has so far been the focus of police investigations into hacking - were taking an interest in hacking.

Needless to say, the tape recording does not prove that the journalist actually hacked Gordon Taylor's phone. And for what it's worth, the journalist when interviewed by his current employer - which, as chance would have it, is News International - denied wrongdoing.

In 2009, the journalist moved to the Times, which is owned by News International.

When the tape was put on the internet by the New York Times in September 2010, the journalist disclosed to News International that he was the person talking to Mr Mulcaire on the tape.

He also told News International that he was talking to Mr Mulcaire in his role as an Evening Standard Ìýjournalist, although there is no evidence that his conversation with Mr Mulcaire led to any story being published by the Evening Standard.

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The takeover in 2007 of EMI by Guy Hands' Terra Firma - just as the bubble in financial markets was going pop - will go down in British corporate history as one of the worst ever deals.

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The private equity firm Terra Firma and its backers have lost the entire £1.7bn they put into EMI. And Citigroup, the giant US bank, which provided debt finance for the takeover, has written down what it is owed from £3.4bn to £1.2bn - which means that it has incurred a loss of £2.2bn.

That makes total losses from the takeover of £3.9bn.

Following a decision by EMI's directors that the business was insolvent, the assets have now been transferred to the ownership of Citigroup.

The US bank will sell the company, although sources close to EMI insist that Citi will take its time and there will not be a fire sale.

In the music industry, it is widely believed that EMI's recorded music business could end up owned by Warner Music and EMI's more valuable publishing operation may be sold to another private equity firm, KKR.

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BP shareholders now have some idea of the long term cost for them of the Gulf of Mexico oil spill - because the British oil giant has today announced a halving in the dividend it pays compared with what it paid before the environmental disaster.

Those investors will be pleased that they are receiving a dividend again, after its cancellation for nine months - which cost shareholders £4.9bn.

But the new dividend they will be receiving of 7 US cents a share means that in total they will be getting £3.2bn a year less than what they were receiving in 2009.

Although BP says it is resuming a "progressive" dividend policy (which means it hopes that dividends will rise in coming years), it's not unreasonable to estimate that over 10 years the Gulf debacle will cost BP shareholders some £40bn in lost income - which given the importance of BP shares in our pension funds represents a considerable loss to millions of people.

Against that backdrop, it was inevitable that BP's chief executive at the time of the Deepwater Horizon explosion and spill, Tony Hayward, had to resign, to be replaced by Bob Dudley.

As for BP's estimate of the costs of the Gulf debacle, that has risen slightly to $41bn or £26bn - which means that in 2010 BP lost $4.9bn (£3.1bn).

The other big news is that BP is halving its oil refining capacity in the US - with the planned sale of two huge refineries, in California and Texas. That will see BP disposing of the site of the disaster that preceded the Gulf leak, Texas City - where in 2005 an explosion killed 15 workers and injured 170 others.

The US refining disposals are of practical significance, because they make BP a less complex business to manage. And they are of psychological significance, because they represent a partial unwinding of the mega US takeovers - of Amoco and ARCO - made when John Browne was BP's "Sun King" chief executive.

Update 10:06: It is worth noting that there has been a strong recovery in BP's profits in the last three months of the year - thanks largely to the rising oil price.

In spite of the asset sales made by BP to strengthen its balance sheet, total revenues rose 14% to $84bn (£53bn) during the final quarter of 2010.

And net profit for that period was $5.6bn (£3.5bn), a rise of 30%.

Update 15:45: There has been a big blow to BP in the High Court just now.

AAR, BP's Russian partner in its TNK-BP joint venture, has won an injunction blocking BP's plan to explore the Arctic in collaboration with the Russian energy giant, Rosneft.

The share swap with Rosneft has also been blocked.

The deal will now go to arbitration in Sweden.

See my post earlier in January for more on this.

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