It was banking policy that frustrated Lord Oakeshott

It is no great secret that one of the policy areas that most frustrated Lord Oakeshott about the coalition was banking.

I can't speak for him, and in any case I'm not sure exactly where he stood, except that I believe he felt - as many of us do - that the big banks were still a threat to economic stability and had failed to change their risk-taking behaviour, just as their bonuses still encourage insane and corrosive speculation.

It is ironic therefore that his great friend, Vince Cable, was partly responsible for financial policy, and we might assume also frustrated by the slow progress an unreformed Treasury was making towards reforming the banks.

I don't know how much the compromise position that has been enacted, which fails short of breaking up the banks, satisfied Oakeshott.  It doesn't really satisfy me, but it is at least action.

Where the coalition has not been effective at all is on the other side of all this - not so much regulating the risk-taking of the big banks but providing us with an effective banking network to support small and medium sized enterprises.  In fact, Oakeshott resigned from the front bench over the wholly ineffective Project Merlin in 2011.

One of the Lib Dem frustrations of the coalition is that, while they can intervene to prevent poor policy going ahead, there is little they can do - without extraordinary skill and energy - actually to initiate major changes.   Banking is one of these area which needs distinctive Liberal Democrat action and never really received it.  I've no idea if, in the end, a solely Lib Dem government would have been more effective on this in 2010, but the coalition certainly hasn't.

But the figures released last week should give any party pause for thought.  It appears that despite the recovery, the amount of money being lent to small business is still falling in the UK.  In fact, there are only two nations in Europe where SME lending hasn't recovered to 2008 levels: Hungary and the UK.

It is no longer possible to ignore this.  The big banks no longer want to be involved in the SME market, and it is no longer conceivable that an effective policy might be to wait hopefully for P2P lending to growth to the size it needs to be, or to wait around for the banks to change their minds (respectively the policies of BIS and the Treasury).

I didn't agree with Lord Oakeshott's verdict on the Lib Dem leadership - quite the reverse, I believe that Nick Clegg is one of the most effective leaders the party has ever had, operating in extraordinarily difficult conditions - but he was absolutely right about the banks.

Luckily, I believe the Lib Dems are likely to make effective local banking a key plank in any future policy platform.

I hope they do, because providing the UK with the local banking infrastructure that most countries in Europe already have - and using that as the cornerstone of a policy to support SMEs - seems to me to be the basis for an effective and distinctive Liberal economic policy.