Bank reforms to cost up to £7bn despite concessions

The cost of banking in Britain is set to rise sharply, the City warned yesterday, despite the Government's watering down of the Independent Commission on Banking's recommended reforms.

But the concessions drew a cautious welcome from the markets with three of the big four banks closing up on the day. Barclays closed ahead 4.45p at 192.75p, while Royal Bank of Scotland gained 6.9p to 229.4p. Lloyds inched ahead by 0.2p at 29.75p and HSBC added 0.5p at 545.5p.

While retail banking operations will still have to be ringfenced from risky, casino-style banking, Sir John Vickers, who led the Commission, criticised the Government, saying it should have demanded banks hold more capital.

The range of activities that can be carried out within the ringfence has also been increased in the White Paper outlined by the Treasury Financial Secretary, Mark Hoban, following intense industry lobbying.

That led the British Bankers' Association to say that the paper "balances the need to establish a banking system which is more certain and more secure with the ability of banks to continue to provide the full range of services to customers and support to the economy".

But the BBA's chief executive, Angela Knight, said that even so the estimated costs of between £4bn and £7bn a year were "very substantial" and did not even include the expense of moving to the new regime.

Mrs Knight also pointed to outstanding questions such as how the reforms will affect banks headquartered in the UK but working largely outside it, as with Standard Chartered. And she is concerned about banks being subjected to competing regulatory regimes from several different countries.

John Liver, head of regulatory reform at Ernst & Young, the accountancy firm, also said the reforms would "raise costs" despite the concessions. He warned that banks will have to pay more for funding, with this cost being "passed on to the consumer".

The concession on the capital banks have to hold, however, was seen as crucial by UK banks, which have long argued that the UK should stick to "international norms" and not "gold-plate" regulations imposed from bodies such as the EU or the Basel banking supervisors.

This led the Government to stick to a 3 per cent ratio of equity capital against a bank's gross loans and investments, agreed internationally and enshrined in the Basel III rules. Sir John wanted 4.06 per cent.

But David Buik, partner at BGC Partners, said the Government desperately needed to get banks lending. "The Chancellor knows full well that extra capital will be an added cost to the consumer. He needs to get lending to SMEs moving; so he instructed Mark Hoban to offer some goodwill."

The CBI said the Government's focus must move on to the economy.