Move over Darling. Your Banking break up doesn't go far enough. We need econo-diversity to ensure real competition and choice.

One also wonders how much this will cost the taxpayer after yet another cash infusion of billions into the state owned banks last week (another £8 billion to Northern Rock and £5 billion to Lloyds). Quite why that £13 billion couldn't be spent on supporting business directly escapes us.

Meanwhile there seems to something of a battle going on in government over the future of Northern Rock in particular, with some figures in the PM's camp suggesting that the Treasury's planned sell-off should be stopped so that Rock can instead be turned into a building society owned by its customers.

The move would mean forgoing a potential 'windfall' (perhaps 'repayment' is a better term) for taxpayers but in many ways could be preferable to a straight sell off as it would leave the bank less prone to instability and financial risk and offer consumers some real choice about the sort of bank they want to do business with.

As usual, there are concerns within the Treasury, which aims to reduce public debt and get back some of the £25bn of taxpayers' money which was spent on rescuing Rock.

It has been thought the government would time the sale of the 'good Rock bank' to a newcomer to the industry, such as Virgin Money, ahead of the general election so as to raise cash and to get a political bounce by claiming that the Rock rescue was the 'right thing'.

But if Northern Rock was instead made a mutual, one of its founding mutual principles could be to deliver services to all sections of the community, especially the least well-off. It could also be set up to offer services via the Post Office which would help the latter's branch network.

Over the summer John McFall, the respected chairman of the Commons' Treasury select committee, backed a report written by Prof Bailey's ex boss at Birmingham Professor Jonathan Michie (now at Oxford) and commissioned by the Building Societies Association, which urged the government to shelve plans to sell Northern Rock and instead become a mutual again.

Michie's report 'Converting failed financial institutions into mutual organisations' made four key arguments in support of this approach: bio-diversity (what we call 'econo-diversity'), risk appetite, competition and as the best means of repaying the taxpayer.
The report argues the more diversified a financial system is in terms of ownership and governance structures and portfolio make-up, the better it is able to weather the strains produced by the normal business cycle.

Mutuals, which are not owned by investing institutions, can counter-balance the short-termist pressure of the City as long as management doesn't do a 'West Brom' and copy the high risk lending of PLCs. We would add that state run providers could also add to the mix, and could help avoid 'rip-off Britain' in the banking system.

Mutuals can also play a role in reducing the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies, the report says.

Professor Michie said: 'We must not allow the UK's financial services sector to return to the 'business as usual' model that has proved so costly to the economy and public finances. Already we are seeing a return to the bonus culture. This is fuelled by profits boosted by the increased market power of banks. It is vital that the banks face competition from mutual building societies. That would also reduce the risk of the credit crunch being repeated. Remutualising Northern Rock would thus deliver to consumers and taxpayers.'

He's right, of course. It could certainly help consumers as well. There's a pretty large gap now between the biggest mutual Nationwide and the rest of the building society sector, so adding Rock would bring a sizeable lender and enhance the market.

Forget the carpet-bagging of the 1990s and the de-mutualisation that went with it - look where that got us. Now, mutuals' (renewed) attitude to risk and the lack of shareholder pressure is arguably more in tune with public sentiment.

Overall, there needs to econo-diversity in the banking system to give consumers choice about where to bank, and to offer low-risk, high-quality services. That should include PLCs, mutuals like a renewed Northern Rock, as well as state-owned banks which would lend at competitive rates and help keep the sector competitive.

As John Lewis and Cooperative Financial Services have both shown, a cooperative philosophy can also be good for the bottom line. And for Labour, they could challenge Tory leader David Cameron on what he sees as the way forward for the banking system - afterall he has said of late that 'we're all in it together'. Well, prove it.

Labour, meanwhile, have to come up with a set of basic principles on which to base the banking restructuring, something they have so far failed to deliver. More on that tomorrow, after the statement on breaking up Lloyds and RBS.

Professor David Bailey works at Coventry University Business School and John Clancy runs two SMEs including MediaFuturesAlert.com