Osborne must try to sit on the fence

A S GROWTH slows and the chorus of criticism swells, chancellor George Osborne might wish he had kept his cards a little closer to his chest at Mansion House in June.

His endorsement of the Independent Commission on Banking’s (ICB) proposal for a ringfence around banks’ retail operations before the Treasury could even say anything about how it would work certainly provoked some furrowed brows in the City. And now the chancellor faces the prospect of implementing whatever it is that John Vickers’ ICB produces amid the growing threat of a double dip recession and a European financial crisis.

Supporters of the mysterious ringfence proposal suggest that it will bolster financial stability and therefore contribute to growth in the long run – although they cannot say exactly how.

But there is little sign that a ringfence would have mitigated the 2008 bank collapses and there is no evidence that it would halt European contagion.

In fact, in conjunction with the FSA’s liquidity scheme, which gives retail deposits a low weighting, it could instead concentrate risk by forcing retail banks to buy more government bonds rather than share funding with their investment banks.

And it will cost small businesses (SMEs) too: Santander UK has warned that a ringfence could force it to raise the cost of SME loans to by one per cent, regardless of how competitors act.

The question is how Osborne will extract himself from this mess.