Economic recovery must come before bank reform says Knight

Plans to reform the banking sector should be put on hold until the economy has recovered and taxpayers have been repaid for the bail-outs, the head of the British Bankers’ Association (BBA) has said.

Angela Knight, chief executive of the BBA, said it was not the right time to add to the sector’s regulatory burden and that the priority should be for banks to focus on lending.

Her comments come a fortnight before the Independent Commission on Banking (ICB) is due to publish its final recommendations on how to increase stability and competition in UK banking. It is expected to recommended ring-fencing banks’ retail operations from their investment banking arms, although it will be up to Chancellor George Osborne to decide whether and at what pace to implement any reforms.

Knight believed markets and economies were more fragile than when the ICB published its interim report in April and that imposing reforms on lenders risked denting confidence and cutting the supply of credit to the economy.

She added: “We have a high degree of uncertainty, market turbulence and lack of confidence that governments in other countries have got a sufficient grip on their economies. We are in for a very difficult autumn.

“This is, therefore, the time to concentrate on economic recovery and paying back the government and taxpayers. By all means think about new regulation but now is not the time to add that as an overlay with respect to costs, uncertainty or whether it is going to do anything beneficial anyway.”

Knight said the ICB must offer its proposals for debate in the context of other changes already in train, such as new rules on capital requirements.

Last month MPs rounded on the ICB’s proposals to reform the sector, with the influential cross-party Treasury select committee warning that the ICB’s interim report had not addressed certain issues – such as a full split of the banks and corporate governance – in enough depth.

The interim report opted for separating retail and investment banks within a shared parent instead of a full split to form two new companies. But in its own report on the ICB proposals, the committee of MPs said it needed to explain more clearly why it was against a full separation.

The Treasury committee pointed out that the option had been covered in just one page of the ICB report. “This thin treatment by the ICB of full separation is not convincing as a demonstration that full consideration has been given to this option,” it said in a statement.

UK Financial Investments, which manages the government’s 41 per cent stake in Lloyds and 83 per cent holding in RBS, has also warned that continuing uncertainty over regulation could delay the sale of the government’s holdings.

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