The Organisation for Economic Co-operation and Development (OECD) said in its latest report on the UK that ring-fencing recommendations should be implemented “to shield the taxpayer and the domestic economy from failures in the financial sector”.
Its backing for the plans come after Mr Osborne launched the Banking Reform Bill on Monday, telling Britain’s biggest banks they will face separation if they flout new rules.
The legislation will give the government and a new banking watchdog powers to “electrify the ring-fence” if banks fail to split high-street branch operations from the dealing floor.
The OECD said ring-fencing “makes it easier and less costly to resolve banks that get into trouble, avoiding an excessive burden being borne by taxpayers, and it makes retail banking more resilient to external financial shocks”. But it added: “Nevertheless, ensuring that the ring-fence between investment and retail banking is and remains effective will require careful financial system supervision and monitoring of shadow banking.”
On the British economy, the OECD said the short-term outlook was “weak”, but predicts growth of 0.9 per cent in 2013, rising to 1.6 per cent in 2014.
The think tank suggested Mr Osborne may need to adjust his austerity plans, saying “if growth significantly underperforms expectations over the coming months, the flexibility of the fiscal framework should be utilised”.