- guardian.co.uk, Friday 30 April 2010 12.30 BST
The skyline of the City of London. Photograph: Paul Owen
Britain's biggest banks are trying to convince the leaders of the G20 that new rules forcing them to hold billions more pounds of capital could push the UK back into recession.
The warning of the impact on the economy is contained in a preliminary report by accountants PricewaterhouseCoopers, which was commissioned by the banking industry to assess the damage the new regulations could cause to an economy that grew by just 0.2% between January and March.
The report is intended to be completed in time for the G20 meeting in Canada in June and currently shows that two full percentage points could be sliced off economic growth as a result of a package of measures that forces banks to build up bigger capital cushions, and hold liquid assets such as government bonds that can be sold easily in the event of a crisis.
Regulators want banks to hold more capital to make it less likely that they will need to be bailed out again and more liquid assets to avoid a rerun of the credit crunch that preceded the 2008 banking crisis, when the markets seized up because banks were stuck with financial instruments that their rivals refused to buy.
But banks argue that if the requirements become too stringent they will not have enough spare cash to lend to businesses and householders.
The report is being prepared as the UK is confronted by a row between the political parties about how to stimulate the economy – and get banks to lend – and cut the budget deficit to protect the country's important AAA credit rating, which affects the price the UK pays to borrow on the financial markets.
The banks have also been responding to consultations by regulators about the changes, to make similar warnings.
Lloyds Banking Group, 41% owned by the taxpayer, has told a crucial international regulatory body based in Basel, Switzerland, that the new rules "risk causing very serious damage to our fragile economic recovery, especially if implemented within the proposed timetable, as well as having a negative impact on economic growth in the longer term".
The regulators are coming under pressure to delay the implementation of the stringent rules and the Financial Services Authority, which regulates the City, has insisted it will not bring in its new rules until it is certain that the economy is recovering.
The FSA's new proposals to demand banks hold more liquid assets – notably government bonds – could cost the industry £2.2bn a year to implement and on one estimate, banks will need to hold an extra £110bn of government bonds. In a worst-case scenario a total holding of £900bn might be required to avert another financial crisis.
The British Bankers' Association confirmed that PWC was carrying out analysis for the banks on the cumulative effect on the economy of the next wave of capital and liquidity proposals, and other changes that could hit the sector.
"The industry has always said that it is at the table for change but at the same time it is essential to assess the impact of these changes on the wider economy and the PWC analysis will be a vital contribution to both UK and international discussions including the G20 process. Other countries are also undertaking similar work," said a BBA spokesperson.
"The analysis is yet to be completed but we will at all times be discussing with the various authorities the issues that arise from the study."
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