LONDON German and French plans to reform banks will leave big lenders largely intact, despite a welter of rules aimed at making sure taxpayers are not forced to bail them out in the next crisis.
It is more than four years since leaders of the top 20 economies (G20) pledged after the collapse of Lehman Brothers to make the financial system safer through sweeping changes.
But talk that reforms would entail splitting up banks - to hive off riskier businesses and ensure no firm was "too big to fail" - has cooled as policymakers fret that this would make it harder for lenders to supply credit to sluggish economies.
As a result, Germany is opting for modest reform by capping risky trading activities rather than asking for them to be divested, whatever the circumstances, according to a draft law seen by Reuters on Wednesday.
France also wants to curb risky trading, while Britain plans to go further and force its banks to wrap their deposit-taking arms with extra capital to survive shocks that might come from the investment banking side of their business.
This idea was backed by Finnish central bank governor Erkki Liikanen to implement at the European Union level, but the bloc's financial services chief Michel Barnier was reported on Wednesday to be against doing anything that could harm banks' ability to serve the economy.
The dilution of such measures, creating a "Liikanen lite", is representative of a more widespread rolling back of what had at one stage been seen as more deep-seated changes.
The Basel Committee of banking supervisors from across the world agreed this month to ease their rule requiring banks to build up cash liquidity buffers from 2015, saying they did not want to hamper lenders from helping recovery.
The G20's focus has already shifted from regulation to spurring growth, with few voices warning this risks allowing banks to get off scot free from changing the way they operate.
The European Union and United States, representing the bulk of global capital markets, have yet to put in place formally all the bank capital and derivatives rules they and other world leaders agreed they would by last month.
"Maybe in reality the detail is difficult and there are persistent economic conditions which favour taking a slightly more measured approach such as with liquidity," said David Hiscock, a senior director at the International Capital Market Association, an industry body.
"These are modifications to the G20 programme, but no one has said we should rip all this up."
In any case, a disconnect has emerged between introduction of rules and what is happening on the ground, as banks are already taking steps to get ahead of future changes.
"Regulators are not waiting for the rules to be in place to enforce them as we are seeing a fast-forward of supervisory behaviour," said Etay Katz, a financial lawyer at Allen and Overy.
The Basel III accord approved by world leaders was due to come into force this month and require banks to triple their pre-crisis capital reserves to at least 7 percent by 2019.
But the world's biggest banks already meet or exceed this target to reassure nervous investors as well as regulators.
Many banks also meet Basel's liquidity rule well ahead of a phase in which starts in 2015.
Sweeping reforms of derivatives should have been in place by December so that contracts are traded on platforms, cleared and reported to shine a light on a $640-trillion market whose opacity alarmed regulators dealing with Lehman's fallout and the near collapse of insurer AIG.
Exchanges like ICE (ICE.N) have stepped in to take first mover advantage and now clear large volumes of credit default swaps for banks well before this becomes mandatory.
ICE is also buying NYSE Euronext NYX.N for its London LIFFE derivatives trading platform, an $8-billion bet that swathes of derivatives now being traded between banks will end up being transacted on exchanges.
Many derivatives trades are also being routinely reported.
In other reforms, hedge funds must now be registered to operate and report data to supervisors, another G20 pledge.
Curbs are also in place on bankers' bonuses with mechanisms for clawbacks - a concept unheard of before the crisis.
But perhaps the clearest sign of how capital and liquidity rules hurt even before they are formally in place is the big fall in banks' return on equity, or ROE.
Pre-crisis, ROEs were 20 or higher. They have now fallen to under 10 and below the cost of capital, unsustainable without big changes to business models, the tacit, fundamental goal of regulators and their reforms.
"Ultimately, the legislation and regulations have to be in place, but sometimes - well, at all times - it's more important to look at the facts on the ground," said Mark Carney, who heads the G20's Financial Stability Board regulatory task force.
But the G20's most difficult and, for the taxpayer, most important task, will likely take years: the ability to wind down a cross-border bank like Lehman Brothers without market mayhem.
Carney, the Bank of Canada governor who will move to the Bank of England this year, said this week there is more to be done to address "too big to fail", meaning an end to markets believing that governments will bail out a failing big bank.
A draft EU law to force cooperation among the bloc's regulators is bogged down in arguments over how to make bondholders bail out a lender in trouble.
"Resolution of cross-border banks is a long-term goal that is 10 to 15 years away," Katz said.
As a stop-gap measure, supervisors in Britain, the United States and elsewhere are forcing local and foreign banks on their turf to hold even more capital and liquidity - at the cost of fragmenting markets.
(Editing by Alastair Macdonald)