Banks warn of the dangers of splitting sector

Speaking at the British Bankers' Association conference, industry grandees launched a robust defence of the sector, highlighting its "social usefulness" and role in aiding economic recovery.

Stephen Green, chairman of HSBC, also stressed the need for a co-ordinated international approach to banking reforms to avoid putting the UK at a disadvantage.

Royal Bank of Scotland chief executive Stephen Hester said reform to the system must not be over-simplified to reflect a wistful "Hovis advert" view of banking.

Business Secretary Vince Cable wants to split banks' retail and investment banking arms, and is setting up a Banking Commission to investigate this.

"There is no point administering medicine that treats the wrong ailment," said Mr Hester. "It is a mistake to think that separation of the banks is the answer so that investment banks can be allowed to fail and retail depositors protected from failure."

He added without the risk-taking of investment banking arms, farmers who hedge Euro-denominated farm support payments would be exposed to significant losses; infrastructure projects from schools to roads would grind to a halt, and multinationals like Shell could not make and receive payments.

"Banks splitting may touch emotional buttons but I fail to understand the logic of seeking to create an arrangement which will then be detrimental to financing the economy," said Angela Knight, chief executive of the BBA.

In a direct response to Lord Adair Turner's claim that much of the financial sector did work that was "socially useless", Ms Knight insisted "banking is socially useful".

"The blame game has gone on far too long and the time has now come for a more measured and serious debate," she added.

Almost three years after worried savers queued outside branches of Northern Rock, bankers and policy makers in the UK and Europe are wrestling with how to create a system which allows a bank to fail without causing a domino effect.

"There are real risks both to London and to the economy as a whole from the law of unintended consequences if all those involved do not think very carefully about the policy framework and implications," said Mr Green.

He warned different bonus regimes in the UK, US and Asia could attract a mobile workforce from the UK.

The conference followed comments by Treasury minister Mark Hoban, who called for banks to show restraint over bonuses and said the government is continuing to explore the introduction of a financial activities tax on profits and pay – separate to a 2bn levy announced last month.

On taxes and levies, Mr Green said "the current array of proposals is striking in its lack of consistency".

In a speech to be given today, Lord Turner will call for reform to tackle not just bonuses, but structural problems.

"Large bank bonuses for selling over-complex and risky products of little real use to humanity were a major problem," he will say.

"But that regulatory reform also needs to address more fundamental issues... volatility in the availability of credit."

Financial Services Authority (FSA) yesterday unveiled plans to effectively ban self-certification and fast-track mortgages, while lenders would also have to carry out affordability checks to ensure customers can meet their repayments.

The conference also defended banks' support for small business. Mr Hester said RBS extended more than 40bn of new facilities to UK businesses last year, and has 45bn in credit "available but unused".

"Banks understand their societal responsibilities," said Ms Knight.

HOW CANADA CARRIED ON

Canada's banking system escaped relatively unscathed from the financial crisis thanks to sound policy, risk management and "a bit of luck", according to Gordon Nixon, chief executive of Royal Bank of Canada.

Speaking to the audience of British bankers at the BBA conference, Mr Nixon said new regulation should initiate successful models, such as Canada's. "We don't just need more regulation, we need smart regulation," he said.

Canada emerged from its recession of the 1980s by taking a knife to spiralling public sector borrowing with a harsh austerity plan.

As a result it entered the latest recession in much better shape than the US and UK.