Now Cameron backs calls for delay in bank ‘ring-fencing’

Prime Minister David Cameron is understood to be keen to promote a message to the markets that the UK government is supporting the banks as their share prices continue to come under pressure.

The more conciliatory tack towards the banking sector comes as Royal Bank of Scotland, Barclays and HSBC find themselves among a group of 17 financial firms facing legal action from the US government over the alleged mis-selling of mortgage-backed securities. RBS has said it will “vigorously” defend itself against the action.

It is believed that 10 Downing Street is concerned that too strict an approach to ring-fencing – the basic notion of which has already been sanctioned by Chancellor George Osborne – could drive organisations to re-locate their headquarters abroad. There are particular fears in the market over HSBC, Barclays and Standard Chartered moving abroad.

Instead, Cameron is reportedly poised to shift the political focus on to progress already made on contentious areas such as bonuses and argue that economic growth should take priority over hard-hitting regulatory reforms.

Despite a warning last week by Business Secretary Vince Cable that the banking industry should cease making “semi-hysterical” claims over the potential consequences of the ICB’s proposed reforms, it would appear that last minute lobbying by the sector has begun to pay off.

Although ring-fencing is unlikely to be shelved altogether due to the Chancellor’s promotion of the policy in his Mansion House speech earlier this year, it is thought that Downing Street is favouring a “light touch” approach to separating banks’ retail operations from their riskier investment banking arms. A spokeswoman for 10 Downing Street last night refused to comment, saying: “We are not going to pre-empt the commission on banking. We are just not going into speculation about it.”

A softening of the proposals would please a number of lobby groups including the CBI, whose director-general John Cridland last week warned the government it would be “barking mad” to introduce ring-fences at a time when the UK economy was experiencing anaemic growth.

However, Dick Saunders, chief executive of the Investment Management Association, which represents the UK’s £3.4 trillion asset management industry, yesterday called on the ICB to stick to its guns on ring-fencing. He told Scotland on Sunday that something had to be done to avoid a repeat of the banking crisis and forestall “collateral damage that came to about 10 per cent of the UK’s GDP”.

The ICB’s report, which will be published a week today comes during another difficult period for many of the banks.

All eyes will be on the share prices of RBS, Barclays and HSBC today as the markets deliver their verdict on the US government’s legal assault.

The lawsuits have been filed by the US’s Federal Housing Finance Agency, which is responsible for overseeing the bailed-out mortgage giants Fannie Mae and Freddie Mac. The two firms are said to have lost billions of dollars, partly because of their investments in subprime mortgages.

A spokeswoman for RBS, which stands accused of negligent behaviour in relation to the sale of $30.4 billion (£18.7bn) of mortgages, said: “We believe we have substantial and credible legal and factual defences to these claims and will defend them vigorously.”

The case is the biggest brought so far by regulators against banks for the losses during the crisis of 2007-8 but, in 2009, it was revealed that RBS was also facing action led by the wife of former prime minister Tony Blair – Cherie Booth QC – from three of Britain’s biggest pension funds over massive losses incurred as a result of the bank’s near collapse and subsequent taxpayer rescue.