As Financial Gloom Deepens, Reform of British Banking Rules May Wait

On Monday, a government-appointed banking commission is expected to present its final recommendations on how to protect taxpayers from bearing the costs of any future bank collapses. The plan aims to separate a bank’s deposit-taking business from the riskier trading and investment banking operations, which would be allowed to fail should they run into trouble.

But at a time of heightened economic uncertainty, the government of Prime Minister David Cameron has grown nervous about the proposed changes, said two government officials who declined to be identified because no final decision has been made.

Mr. Cameron is concerned that the changes will drive up banks’ financing costs and in turn limit their ability to lend to British businesses, which would threaten an already weak economy, the officials said.

So even if the Independent Commission on Banking proposes far-reaching changes, London is likely to delay their implementation until after the next election, planned for 2015, the officials said.

“This is a political and not a financial thing now,” said Simon Gleeson, a partner at the law firm Clifford Chance. “What everybody hoped was that by the time we got to reforming banking regulation we’d have a more stable economy. But we don’t and that’s the biggest challenge.”

The British economy grew just 0.2 percent in the second quarter, and the Bank of England has cut its growth forecast for this year to 1.5 percent from 1.9 percent.

The British proposal would make it considerably more expensive to raise capital for investment banking and would be much more painful for Britain’s banks than the so-called Volcker Rule in the United States.

Under the United States approach, originally advocated in a stronger form by Paul A. Volcker, the former Federal Reserve chairman who served as an adviser to President Obama, banks’ freedom to trade with their own capital and manage hedge funds would be limited. But they would still be able to borrow money economically because their balance sheets would remain unified.

British banking executives, nervous that the new rules would increase their financing costs and threaten their credit ratings, have stepped up lobbying efforts in recent weeks.

Barclays and Royal Bank of Scotland would be the most affected by the new rules because they have large investment banking businesses and could see profit drop by a third, according to a research note by JPMorgan Chase.

The chief executive of Barclays, Robert E. Diamond Jr., and his counterpart at R.B.S., Stephen Hester, have held lengthy discussions with the government, arguing in favor of the universal banking model, that is, leaving consumer and investment banking linked. They claimed this had helped their banks to withstand risks, according to a Treasury official who declined to be identified because the talks were private.

In a preliminary report in April, the Independent Commission on Banking suggested limiting the use of consumer deposits to finance the investment banking operation by setting up a so-called ring fence around the consumer operations. On Monday, the commission is expected to give more detail on exactly which businesses should be “ring-fenced” and how strict the separation should be. As an example, banks could be restricted to using deposits only for personal loans and the purchase of government bonds.

Angela Knight, the head of the British Bankers Association, an industry group, said the commission’s proposals would weaken rather than strengthen the financial sector. “Ring-fencing becomes unattractive to investors of all types as it reduces the benefits of diversification, gives borrowers a worse deal, and is inefficient from a capital, funding and operational perspective,” she said.

Among the biggest fears for banking executives is that the new rules would increase the financing costs of investment banking by implying the business would be allowed to fail. Interbank lenders, the executives argue, would demand higher rates in return for the higher risk. The banks’ total financing costs could rise by about £2 billion a year, according to a report by Citigroup analysts.

Eric Dash contributed reporting from New York.

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