Vickers’ ‘reform’ plans will cut UK’s economic growth warns Item Club

Proposals to reform the banking sector could reduce the UK’s economic growth by 0.3 per cent, a leading forecasting group said today.

Recommendations put forward by the Independent Commission on Banking (ICB) to ring-fence banks’ retail divisions from their so-called “casino” investment banking arms could reduce gross domestic product, the Ernst & Young Item Club said.

The ICB, chaired by Sir John Vickers, first touted the proposals in its interim report in April and will publish its final findings next Monday.

Elsewhere, the Item Club warned the financial services sector in the UK faces sluggish growth, threatening the recovery prospects of the wider economy.

The impact of the ICB report poses a significant threat to the financial sector, it said, in addition to the more commonly cited headwinds of an uncertain UK economic outlook, continuing concerns about European sovereign debt crises and European regulatory reform.

ICB ring-fencing proposals will increase the cost of lending to large corporate businesses by 1.5 per cent, the Item Club forecast.

Meanwhile, the cost of wholesale funding to the investment banking divisions would rise by about 1 per cent.

Neil Blake, economic advisor to the Item Club, said: “These predictions are not based on a worst case scenario, they’re based on moderate assumptions about the extent of ring-fencing and don’t assume that the cost of funding to the retail element of banks is affected.

“Depending on what is announced next week, we will need to consider the knock-on impact, not only to the banking sectors but to the UK economy as a whole.”

NATHALIE THOMAS