Ring-fencing investment banking 'could curb growth by 0.3%'

Monday, 05 September 2011 11:20

Separating high street banking operations from investment divisions, as suggested by the Independent Commission on Banking (ICB), could cut economic growth by 0.3 per cent, a report has suggested.

According to the latest study from the Ernst & Young Item Club, erecting firewalls within banks will increase the cost of borrowing for companies by up to 1.5 percentage points.

The organisation went on to claim that ring-fencing would increase investment banking funding costs, which would then be passed on to corporate clients.

As a result, growth would shrink by 0.3 per cent over several quarters, it added.

Neil Blake, economic adviser to ITEM, said if the proposals set out by the commission prove to be tougher than expected, the effects on credit costs and growth could be even greater.

"These predictions are not based on a worst-case scenario," he explained. "They're based on moderate assumptions about the extent of ring-fencing … Depending on what is announced next week, we will need to consider the knock-on impact not only on to the banking sector but to the UK economy as a whole."

The findings are likely to be welcomed by the banking industry, which recently argued that economic recovery in the UK could be derailed as a result of harsh regulations.

Set up by the government last June to review the financial sector after it bailed out some of the biggest banks during the economic crisis, the ICB published its first recommendations in its interim report in April.

Its final suggestions will be released next Monday (September 12th).

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