Banking reform is where the real action will be for the finance sector in this Parliament

How will the banks pitch their response to the Banking Reform Bill?

This week's Queen's Speech probably hasn't done too much to restore the government's political fortunes which have been battered almost daily since George Osborne's Budget unravelled. I have to say that when I looked through the list of proposed legislation I wondered if some things were missing as it seemed to lack genuine political coherence.

Of course, there will be some big battles over the House of Lords reform which Nick Clegg will exploit for all his worth in an attempt to restore the Liberal Democrats much tarnished reputation for championing constitutional reform. He might actually have some success with this if Ed Miliband maintains his present stance of siding with the right of the Tory party over calls for a referrendum, contrary to what was in the last Labour manifesto.

There will also be plenty of sparks flying over pension reform, especially the proposed changes to the public sector pension schemes, but these will very likely get through relatively unscathed after fairly predictable battles in Parliament and trade union demonstrations outside.

Where the real interest lies for the financial services sector is in the Banking Reform Bill which will enact the proposals put forward by the Independent Commission on Banking. This has the potential to pose some very tricky questions within the government and for the Labour Party, as well as put the banks in a rather awkward position in terms of what their response should be.

The first problem for the government should have been who should take the lead on this? George Osborne or Vince Cable? It a Treasury bill and it was Mr Osborne who set up the commission under Sir John Vickers that produced the report that will, we are told, be substantially adopted in the bill. We have already been told that the Chancellor will be making the initial announcement about the contents of the bill, probably in early June, and it will be guided through Parliament by the Treasury team.

With George Osborne's political stock still falling rapidly he is going to be very vulnerable to any criticism that the bill has gone soft on bankers, especially as at the same time Vince Cable's Enterprise and Regulatory Reform Bill will be making its way through Parliament. This will give Mr Cable an obvious platform to promote his message about corporate accountibility with his proposals to give shareholders greater powers, further boosting the revolution that is already causing tremors across the City and caused the downfall of Andrew Moss at Aviva earlier this week.

Mr Cable has been a keen advocate of substantial reform and restructuring in the banking sector for some years and his political reputation has been restored, if not enhanced, by the revelations about how he stood up to Murdoch and News International in a way no other frontline politician has done. The moment there is any suggestion that George Osborne is making too many concessions to bankers expect Mr Cable's allies to push him forward as the man to stand up to the City. The potential for this to cause serious problems within the Coalition is very real.

In my view, it would have been an astute move to hand the bill to Mr Cable in the first place as it would inspire public confidence that real reform was being enacted. After his appalling treatment by Cameron and Clegg over the BSkyB bid this would have been no more than he deserved. Of course, the humiliation for the Chancellor this would have entailed made it impossible for the government to contemplate.

The bill will also cause problems in the banks' boardrooms and public affairs departments.

I think they have a real challenge in deciding how to pitch their repsonse to the ring-fencing proposals which goes a long way to explain their relatively muted reaction to the Commission's report. Do they hammer away at the cost arguments – undoubtedly valid because internal ring-fencing is potentially complex and expensive? Or, will they be fearful of pushing this too hard lest the government turns round and says it will keep it simple and go for complete separation? It is a tough call for them.