Proposed ring-fencing will harm economic growth

| September 5, 2011
”Proposed

Leading think tank, the Ernst & Young ITEM Club, believes the proposed ring-fencing of retail and investment banks will reduce economic growth.

The think tank’s prediction comes just a week before the publication of the Independent Commission on Banking’s (ICB’s) final report on ring-fencing.

The ICB, which was established in June 2010, is considering forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group.

However, according to the ITEM Club, ring-fencing banks’ retail operations from their riskier investment banking activities could result in an increase in the cost of lending to big companies by up to 1.5 percentage points and reduce economic output by up to 0.3% over several quarters.

Neil Blake, economic adviser 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… 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.”

Last week the Confederation of British Industry warned that ring-fencing would ultimately make it more difficult for businesses to get cash from their banks and therefore damage the UK’s sluggish economic recovery.

The banking industry has already stressed that any regulatory reforms should be delayed into the economy is on a more solid footing.

Last month, Angela Knight of the British Bankers’ Association (BBA) said regulatory change could undermine the recovery and UK banks need to focus on lending and should not be distracted by regulatory changes.

Prime Minister David Cameron has agreed with the BBA and is also pushing for a delay to any reforms suggesting that further regulation will force some of the country’s top financial institutions to relocate.

HSBC, which is Europe’s largest bank, has previously denied rumours that it is planning to relocate its UK headquarters to Hong Kong.

The bank has a significant presence in Asia, which has led many to believe the bank would one day move its headquarters to Hong Kong.

Other banks have also recently suggested they may consider relocating after the Government imposed taxes on them.

Standard Chartered recently said it was looking to free itself from stricter regulations in the UK by considering relocating to the Far East.

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