Cost of bank reforms 'will be borne by customers'

The City believes banks will pass the costs of major reforms on to their customers, following confirmation that the Government will legislate for major industry reform.

The Chancellor, George Osborne, said yesterday he wanted to ring-fence high street deposits from higher-risk investment banking "to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail".

This was the most eye-catching of the proposals made by Sir John Vickers' Independent Commission on Banking report in September.

Announcing his formal response yesterday, Mr Osborne also backed recommendations for higher capital buffers so banks can withstand major financial shocks, even though this inhibits their ability to lend.

However, Mr Osborne warned the changes, due to be implemented by 2019, would cost the UK economy £0.8bn to £1.8bn. The move will cost the banks £3.5bn to £8bn, largely because shares remain strong as there is perceived to be a government guarantee of their survival, which will be removed as a result of the changes.

Andrew Gray, a UK banking partner at PricewaterhouseCoopers, said: "There will be reasonable concern that the cost of changes will have a negative impact of the industry. The cost has to be covered somehow, as banks will be less profitable and this will have to be passed on as costs to customers."

The major banks have fought hard against the reforms, arguing that they will struggle to meet the Government's lending targets if their capital is stuck on their balance sheets. However, the Coalition has pledged to reform the industry since it came together last year.

Edward Chan, a banking team partner at the law firm Linklaters, said: "The politics of this goes right to the heart of the Coalition Government. I know that banks will be aggrieved that their lobbying [hasn't paid off], but to a large extent it was doubtful that they could really do much to water this down."