Thinktank rubbishes claims bank reform will hit economy

The Independent Commission on Banking (ICB)’s plans to ring-fence will have a very limited impact on the UK’s economic output, according to Ernst & Young.

A report from the Item Club suggested proposals to force banks to ring-fence their retail deposit and lending arms could knock 0.3% off GDP following a 1.5% percentage point rise in costs for the nation’s biggest borrowers, the FT reports.

The banks have complained the proposals will drive up the cost of borrowing and limit lending, prompting the government to consider halting the new rules until 2015.

However, the Item Club report casts doubt on the banks’ position, according to the FT.

Lloyd Barton, economist at Ernst & Young, said even if banks do have to pay more for wholesale funds to lend on to large companies, they may not even be able to pass those costs on.

“Large corporates can access the capital markets,” Barton said, noting this is the group of borrowers least dependent on the banking system for cash.

“The impact on the economy is not that great,” he said. “Of course, it may have an effect on bank profitability.”

Meanwhile, David Pitt-Watson, a senior City fund manager and member of the cross party Commission on the Future of Banking, has also rubbished claims the ring-fencing rules will damage the economy.

According to the Telegraph, Pitt-Wilson said the new rules may even boost the economy.

"Right now, banks' cost of capital is low because they are 'too big to fail'. As long as the retail bank is still within a ring-fence, it will still be protected, so its cost of capital will not go up, and can do just as much lending as today," he said.

"However, the cost of capital for the investment bank may go up, since it will be allowed to fail. As a result the banks might tend to put more of their resources into the retail bank. The ring-fence might lead to more money going into the economy, not less."

The full ICB report is due for release on 12 September.