Bankers warns about effects of regulatory change on economic recovery

The trade body said that it feared that "uncosted" plans to tighten banking regulations had become the UK's top priority, even ahead of securing economic recovery.

Chief Executive Angela Knight said in a blog post that the Independent Commission on Banking (ICB), set up by the Government to reform the banking system in the UK, appeared not to have "taken a lot of the work already underway into account".

She added that the discussion on banking "remains very emotional", with some parties calling for the ICB to go further than its existing proposals by completely breaking up banks.

The ICB was set up by the Government last year to come up with ways to make UK banking safer and more competitive, including the possibility of structural reform. It is set to publish its final recommendations to the Government on 12 September.

In its interim report (110-page / 2.3MB PDF), published in April, the ICB suggested several changes including the full separation of retail and investment banking operations to protect customers against investment banking losses. This 'ring fencing' would "make it easier and less costly to sort out banks if they got into trouble, by allowing different parts of the bank to be treated in different ways", according to the report.

However, policymakers need to be acutely aware of raising the cost of banking when businesses should be building for economic recovery, said Ms Knight.

"Policymakers, regulators, banks and other businesses agree that our three priorities should be restoring financial stability, securing economic recovery and ensuring regulatory reform is fit for purpose. But there is growing concern that regulatory reform is outpacing the other priorities, with real effects on economic recovery," she said in a statement.

"The City is not alone in calling for urgent consideration to be given to the costs and consequences of regulatory change in the banking sector. This is not an abstract discussion, and it does not simply affect the banks."

She added that the UK was leading a regulatory reform programme which few other European countries intended to implement in full.

"Whatever the conclusions of [the ICB], there is general agreement that they will be significantly costly and have an impact on lending," she said .

"Now is the time, as the eurozone seeks direction, for the UK to show the way in economic recovery. It's the economy first, studies and analyses second, and then more rules third."