Bank ringfencing plans could 'threaten UK growth'

Economists have warned the Independent Commission on Banking (ICB)’s plans to ringfence UK banks’ retail and investment divisions could threaten economic growth.

The warning came as chancellor George Osborne published the Treasury's plans to reform the structure of the banking sector.

The government's response confirmed its plan to implement the ICB's recommendations by 2019, with further detail to follow in April 2012.

Leading economists, led by a former senior government adviser, cautioned the changes could slow growth at a potentially critical time for the British economy, the Telegraph reports.

“We are more dependent on banks right now to get the economy moving again than we have been for some time,” warned Vicky Pryce, the former joint head of the Government Economic Service, who is now a senior managing director at FTI Consulting.

“We need them to lend, and so this has come at completely the wrong time. At such times, you need to add relaxation and ask banks to lend more.”

The reforms suggested by Sir John Vickers, who authored the report, will come into force by 2019 and will cost the banking sector an estimated £7bn.

Publishing the government's response to the ICB report, Osborne said: "The ICB was set up last year to look at what I have called the ‘British Dilemma': how Britain can be home to one of the world's leading financial centres without exposing British taxpayers to the massive costs of those banks failing.

"The government is preparing the most far reaching reforms of British banking in our modern history; our objective is to make sure what happened in Britain never happens again."

But Roger Bootle, managing director of Capital Economics, said the situation is not as straightforward as it looks and could restrict bank lending further.

“If bank regulation is strengthened, banks will be safer and confidence should increase as a result but I think, looking at the reality – to the way banks feel – banks feel under siege," he said.