Banks warn regulatory crackdown could stifle UK recovery

Bank chief says sector faces mounting costs and rules that stop it lending

Britain's banking sector last night fired a warning shot across the bows of the Treasury, urging the Chancellor not to put the UK's financial services sector at a major competitive disadvantage with new regulation that could even choke the economy's recovery.

Angela Knight, chief executive of the British Bankers Association, warned that new rules planned in the wake of the credit crisis threatened to leave the UK's financial industry poorly placed to compete on the world stage – and were a major threat to the UK's return to economic health.

Ms Knight also urged politicians and regulators to end the squabbling over who should be responsible for different areas of financial supervision.

The BBA's warning comes as banks ready themselves for a White Paper on regulation, which is due to be published within the next week. The Treasury's proposals are at the heart of a rift between the Chancellor, Alistair Darling, and Mervyn King, the Governor of the Bank of England, who remain at odds over how to improve supervision of the City.

The BBA said there was a danger that banks would be caught in the middle of the row, as well as by the public clamour for action against those considered culpable for the worst financial crisis the world has seen since the Great Depression.

The worst-case scenario, Ms Knight warned, is that new requirements on banks to hold more capital and maintain better liquidity severely constrain the sector's ability to lend, a problem the both the OECD and the Bank for International Settlements said yesterday was already threatening a sustainable economic recovery for the UK.

"The more capital and liquidity that a bank has to hold, the less they are able to lend," Ms Knight said. "We cannot both hold it and lend it."

Bankers are also concerned that in a bid to appease public anger over the crisis, the Government's politically troubled ministers will go further than other authorities in cracking down on the sector.

"These new requirements will inevitably result in a significant increase in costs for banks operating within the UK," Ms Knight said. "If the UK goes ahead with liquidity requirements in advance of other countries, then it will put this country, our centre, at a competitive disadvantage."

Ms Knight added that the regulatory hurdles faced by banks are likely to be augmented both nationally and internationally. "While supporting the [European Union's] proposal for better cross-border co-ordination on systemic issues and between the many regulators, there is little doubt that greater centralisation, more new directives and amendments to old ones are flowing fast from this Commission and may well flow faster still from the new one," she said.

"These proposals need to brought forward from a base of clear logic and not from either prejudice or the simple desire of the EU to be seen to be doing something."

Ms Knight's comments, which came in a speech to the BBA's annual dinner at the Mansion House in London, reflect the increasing nervousness with which leading banks are studying proposals for regulatory reform, both from the Government and the Opposition.

Those nerves will not have been steadied by an intervention from Lord Mandelson, the Business Secretary, who addressed the same dinner last night, warning that there has never been "such a sense of distrust and anger between the financial sector and the rest of the economy".

Lord Mandelson warned the BBA that the Government believed its members had to do more to lend to both businesses and the mortgage market. "Credit must be made available – and not just available, but reasonably priced," he said.