Costs set to increase despite watered down reforms

The cost of banking in Britain is set to rise sharply, the City warned yesterday, despite the Government's watering down of 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 have to be ringfenced from risky, casino-style banking, Sir John Vickers, pictured, 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 ring fence has also been increased in the White Paper outlined by Treasury Financial Secretary Mark Hoban.

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 chief executive Angela Knight said the estimated costs of between £4bn and £7bn a year were "very substantial" and did not include the expense of moving to the new regime.

Ms Knight also pointed to outstanding questions such as how the reforms will affect banks headquartered in the UK but working largely outside it.