Write-offs 'will be £3bn higher than expected'

The UK's banks will have to write off £3bn more in bad loans than currently expected because of disappointing economic growth, the Ernst & Young Item club claims.

The respected economic forecaster cut its estimates for UK GDP two weeks ago, but it has only just calculated the knock-on consequences for the financial services industry.

With bank assets shrinking, lending to the real economy remaining weak and banks themselves employing fewer people, the financial sector will put further downward pressure on growth, it says.

Neil Blake, senior economic advisor to the Item Club, said: "Given the extent to which highly paid employment in the sector underpins consumer spending, tax revenues and house prices in the UK, the projections for financial services employment is concerning.

"The Government has set out to derisk the sector and make the UK less reliant on it in order to make the economy more secure. Unfortunately, if no other sectors step into the resulting gap, prosperity will go down across the country."

The Item Club is predicting only 0.9 per cent economic growth this year, accelerating to a still sub-par 1.5 per cent for 2012.

A worsening outlook for bank write-offs may be visible as early as this week as banks start to report their third quarter. Despite the eurozone crisis, Barclays is expected to unveil profits of about £1.7bn today. On Friday, Royal Bank of Scotland is forecast to post profits of £400m.