Banking Shake-up May Be Costly for Small Businesses

Independent Banking CommissionRing-fencing the UK’s retail banking system could increase the costs of lending for small firms, business groups have warned.

A report (PDF) ICB Final Report - September 2011 by the Independent Commission on Banking Independent Commission on Banking (ICB) (ICB), headed by Sir John Vickers, has set out a series of key recommendations including ring-fencing the banks’ high street operations ― such as loans and overdrafts for small firms — in order to protect them from riskier investment banking divisions. Banks would also be required to set aside more cash to cushion them from future losses.

In addition, the report proposed increasing the competition between banks by making it easier for customers to switch providers. The protective measures are designed to

“make it easier and less costly to resolve banks that get into trouble”

the ICB said, with the changes helping to strengthen the flow of credit available to businesses and consumers. Banks will have until 2019 to implement the reforms.

However, some business groups have warned that ring-fencing could result in restricted lending for small firms, while others raised concerns that banks could make lending more expensive in order to offset the costs of implementing reforms.  According to the ICB, the proposals are set to cost Britain’s banks £4-£7 billion.

The Institute of Directors Institute of Directors (IoD) said that there was “considerable uncertainty” over how much the cost of borrowing might increase. Small-business owner Martin Gibbons, commercial director of publishing firm EPCD EPCD, said that greater competition between banks was a positive step for small firms as it could lead to “a better choice and a better service”, but said any moves to restrict lending could be “disastrous”.

“During the height of the recession, it was virtually impossible for small businesses like us to borrow from banks, which made life very difficult indeed. Even though most people will welcome a more protected banking sector, business owners will be naturally very wary if the changes mean that lending levels will drop once again.”

The British Chambers of Commerce British Chambers of Commerce (BCC) welcomed the ICB proposals to increase competition between the banks.

“This would mean better terms and conditions for small businesses and would in time drive down costs.”

said John Longworth, BCC director general. Read the full ICB report full ICB report (PDF).

Banking Shake-up May Be Costly for Small Businesses

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