Pressure grows on Ministers to press ahead with proposals for reform of banking sector

Both banking and business groups have claimed that forthcoming proposals to strengthen the banking system in the midst of ongoing turmoil in the global economy might damage the fragile economic recovery.

The Confederation of British Industry said taking action to reform the sector now would be “barking mad”, while the British Bankers’ Association said imposing the measures on lenders risked cutting the supply of credit to the real economy.

However, Business Secretary Vince Cable hit back yesterday, describing the lobbying as “disingenuous in the extreme” and criticising the “special pleading” of bankers, who he said were “trying to create a panic around something which they know has to happen”.

Chief executive Iain Cornish, of Britain’s second biggest mutual, Yorkshire Building Society, said moves to strengthen the balance sheets of banks would dampen their ability to lend but warned that delaying reforms could be “something that we might potentially live to regret”.

He added: “It has to be at a sensible time frame. But you have to grasp the nettle.”

The Independent Commission on Banking will report on September 12 and is expected to recommend ring-fencing banks’ retail operations from their investment arms.

Last night, Government sources told the BBC the reforms might not come into force until 2015 as Mr Cable played down talk of a rift within Government between the Liberal Democrats and the Tories, who are seen as closer to the City.

Mr Cable, who has been a long-term advocate of separating operations, said reform was needed. He said: “We can’t have big global banks with balance sheets bigger than British GDP “underwritten by the taxpayer”. He added: “This can’t go on and it has got to be dealt with.”

But the Financial Leeds lobby group warned ring-fencing would be a big and expensive exercise. Chief executive Howard Kew said: “At a time when the banks are trying to strengthen balance sheets then these costs would slow that process down.”

He pointed out that retail banks could get into major difficulties, citing the examples of Bradford & Bingley and Northern Rock.

Senior stockbroker David Scott at Leeds-based Redmayne Bentley said the debate over the timing of reform was “largely academic” because UK banks will probably need more taxpayer support if the sovereign debt crisis in the eurozone worsens.

He added: “If we have a Greek bank default, which is looking increasingly likely, then it’s going to cause all sorts of chaos.”

Any changes recommended by the Independent Commission on Banking would require legislation to implement and would not come into force immediately.

Prime Minister David Cameron said no decisions should be made until its publication, adding: “I think the key thing we want from banks is lending into the economy so we can support growth and jobs, and we need to make sure we are not taking risks that put jobs at risk.”

The Treasury would not confirm reports last night that Chancellor George Osborne had lined up a series of meetings of bank executives ahead of the Vickers report’s publication. Mr Osborne is due to meet Barclays chief executive Bob Diamond and Ana Botin from Santander in the coming days, Sky News reported.