Vickers’ bank ringfence to reduce GDP growth


ING structural reform on banks could slash the UK’s GDP growth by 0.3 per cent, according to an independent forecaster.

The warning will add to worries in Downing Street that, alongside the Eurozone crisis, Vickers could contribute to a perfect storm threatening to tip the UK back into recession.

The Item Club, a body run by accountancy Ernst & Young, says in a new report today that proposals from John Vickers’ Independent Commission on Banking (ICB) will choke off credit to the UK economy, more-than-reversing last quarter’s anaemic growth of 0.2 per cent.

Vickers is preparing to release a report next Monday that will recommend forcing banks to ringfence their retail operations from their investment banking arms.

Banks would have to capitalise the two subsidiaries separately, which the Item Club estimates will push up the cost of funding for investment banks by 100 basis points.

That in turn could cause “fragile” banks to increase the cost of their loans to corporates by 150 basis points.

E&Y’s Andy Baldwin says that the “combination of regulatory change, lower leverage and an uncertain economic outlook” means that “credit shortages could restrict the pace of economic recovery”.

Over the weekend it was reported that Prime Minister David Cameron was making it known that he favoured diluting the banking reforms, worried about their effect on jobs and the overall economy.

Cameron could find this strategy difficult, however, because Chancellor George Osborne has already committed himself to implementing the policy.