Banks warn tighter ICB rules will curb lending

Bankers have warned that billions of pounds of lending to business could be put at risk if policymakers press ahead with "uncosted" plans to tighten banking regulations.

As the industry awaits the final report of the Government's Independent Commission on Banking with increasing trepidation, the British Bankers' Association yesterday said it feared that tightening the rules on banks had become Britain's top priority, ahead of even securing the economic recovery.

And it warned that proposals by the Independent Commission on Banking to create a strict separation between retail and commercial banking would force banks to rein in drastically their lending to businesses. Retail deposits are available to banks for lending to business, but the ICB final report on 12 September could change that.

Angela Knight, the BBA's chief executive, said she was joining a "chorus of concerned bankers and business people" in voicing fears about the approach of the ICB and regulators in general.

She said: "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.

"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," she said. "This is not an abstract discussion, and it does not simply affect the banks. Whatever the conclusions of the UK's Independent Commission on Banking, there is general agreement that they will be significantly costly and have an impact on lending."

Mrs Knight was commenting the day after the Association of Corporate Treasurers – which represents finance directors and company treasurers – voiced similar concerns. Several senior bankers have also sounded alarm bells about the ICB's direction.

She urged policymakers to put the securing of economic recovery first. "The UK is leading an international regulatory reform programme which has been largely uncosted. Its economic impact has not been assessed. And few countries intend to implement it in full, but are instead selecting the parts they consider relevant," 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."

Her statement comes against a backdrop of sharp declines in bank shares, amid fears about whether the sector can cope with the sovereign debt crisis and a possible "double-dip" recession. The BBA pointed to the recent report by the Bank of England's head of financial stability, which highlighted concerns about market volatility and "a yo-yoing appetite for risk", as one good reason why a sharp rise in the industry's costs should be avoided.

However, critics have argued that Britain's old "light touch" regulatory regime resulted in the country being worse affected by the banking crisis than rivals. They say there should no longer be a "race to the bottom" on standards and have pointed out that Switzerland has imposed tough new rules on its banks.

The ICB declined to comment.