Banks Ready To Accept Ring-Fencing 
When the heads of the major UK banks appeared in front of the House of Lords Economic Affairs Committee this week they accepted that ring-fencing their retail operations from their investment arms was probably a “done deal”, which they would accept.

The ring-fencing proposal was put forward by the Independent Commission on Banking (ICB) and its Chairman, Sir John Vickers, argued the downgrade of British banks on the back of the Commission's final report was an "entirely benign development" for the economy.

The banking heads were not fully in agreement with the proposal however; Stephen Hester, Chief Executive of Royal Bank of Scotland said that there was a significant risk that the costs of the proposal “will not be balanced by their benefits”.

And Sir Win Bischoff, chairman of Lloyds Banking Group, argued that the cost estimate given by the Commission of £4bn to £7bn could be far higher and that the report had not provided a definitive analysis of these costs.

Other heads echoed the caveats; HSBC Chairman Douglas Flint said: "Ring-fencing won't impact the availability of funds (to lend to businesses), but it will impact the cost.”

Ana Botín, Chief Executive of Santander UK, warned the Committee that the bank might have to cut back on "certain services" it provides to small and medium-sized companies as a result of the regulatory changes.

Bob Diamond, Chief Executive of Barclays, also questioned the value of ring-fencing, arguing that investment banking was not inherently more risky than retail banking. And Mr Hester agreed that since the crisis, RBS had lost more money on "regular lending" than on its investments.

However, despite the hints of deleterious knock-on effects to business and investors, the conclusion was that the banking industry as a whole accepted the need for banks to be reformed "to the point where taxpayers don't have to put up (any more money)".

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SMEs Face “Deeper” Funding Problem 
In an interview yesterday Business Secretary Vince Cable has admitted that small and medium-sized businesses (SMEs) face a funding problem despite the Project Merlin deal to encourage bank lending to them.

Mr Cable defended the Project Merlin agreement but admitted that “new mechanisms” would have to be considered, including the ‘credit easing’ announced by the Chancellor last week.

In an interview with The Guardian Mr Cable said that Project Merlin had been just one response to the “near collapse” of the banking system in 2008.

"I think the Merlin agreement, contrary to some of the criticism, has been useful. But there is a deeper problem and that is why new mechanisms have to be looked at," he said.

However, as recently as last month, the Governor of the Bank of England, Sir Mervyn King implied that Project Merlin’s figures were misleading.

Under the credit easing scheme, the Treasury will buy small firms' corporate bonds, providing cash direct to SMEs unable to gain funds from the banks, with the Bank of England acting as the Treasury's agent.

The scheme in itself could be viewed as an admission that the banks are still not lending properly and its announcement has been jumped upon by critics of Project Merlin as an admission of just that. It also represents a major step by the Treasury and brings it closer to direct involvement in monetary policy.

Mr Cable admitted that there were “procedural issues” with the credit easing policy, such as the small size of the SME bond market, but he believes that securitizing SME loans, where loans are bundled together and sold to investors, cold be one solution.

"It would have to be coupled with measures to ensure that the banks ensure that credit goes where it is supposed to go," he added.

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Cost of Living At 20-Year High 
According to economists at Oriel Securities, consultants in corporate and institutional stockbroking, spending on essentials such as food utilities, petrol and mortgages accounts for over 7 per cent of household income. Ten years ago the spending on such items was more than 10 per cent less.

The rise in the basic cost of living has come despite a sharp fall in mortgage rates to their lowest level on record. Mortgages are households' second-highest monthly expenditure after food,

The average mortgage rate is 3.43 per cent, but the size of households' debt burden means that this accounts for 17.7 per cent of disposable income.

Darren Winder, Oriel's UK economist, said that interest rates will have to remain low for the forseeable future if households are to deal with their debt. "Debt is crowding out growth in the economy," he said. "Households need more cash."

The analysis come as householders surveyed reveal that over half of them are considering eating into their savings to meet mortgage payments or just to pay for other essentials such as food and heating.

Oriel's analysis estimates that the average household spends £2,091 a month on essentials, puts £162 into savings, and has just £854 left for "discretionary", that is non-essential items, which could be anything from holidays, to books, to clothes. Adjusting for inflation, the last time discretionary spending was so low was in 2000.

Household spending accounts for 60 per cent of GDP and this has contracted by 1.7 per cent in the last year as householders feel the economic squeeze. According to Mr Winder, the biggest impediment to an improvement in cash flow would be a rise in interest rates.

However, the Bank of England’s Monetary Policy Committee (MPC) has indicated that interest rates are likely to remain at the historic low of 0.5 per cent until 2014.

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Red Tape To Be Cut 
The Government announced the start of a consultation yesterday, which could see small businesses saving more than £600m in audit fees every year. The consultation on Audit Exemptions and Change of Accounting Framework sets out plans to allow more small companies and subsidiaries of larger ones to change their accounting framework.

Current EU rules mean that to classify as ‘small’ for accounting purposes, a company must comply with two out of three criteria relating to their turnover, balance sheet total and number of employees. However, to obtain an audit exemption in the UK, small companies must fulfil both the balance sheet and turnover criteria.

Under the new proposals, UK SMEs would be eligible for audit exemption by meeting any two of the three criteria, saving them an estimated £206m per year.

The Government is also proposing to introduce legislation in 2012 to exempt most subsidiary companies from mandatory audit, provided their parent is prepared to guarantee their debts. Savings are estimated at £406m per year.

These moves are part of the Government’s wider focus on cutting red tape and reducing unnecessary burdens on business, in particular addressing the impact of European legislation.

The Minister responsible for Corporate Governance, Edward Davey, said:

“Over time, both the volume and costs of reporting requirements for UK companies have increased, and businesses have stressed to us the need for more flexible and targeted rules. Tackling these problems now will save UK SMEs millions every year and give them more opportunities to expand and grow their business.

“Audit is very valuable for many companies. But the proposals we’ve published today are aimed at removing EU gold plating and freeing up enterprise, which ultimately benefits the whole UK economy and will help put us on the path to long-term, sustainable growth.”

The consultation closes on December 29th 2011.

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Growth Figures Revised 
The UK economy only grew by 0.1 per cent in the second quarter of this year, which was less than the 0.2 per cent estimated by the Office for National Statistics (ONS). And output from the service sector grew by 0.2 per cent in the quarter, compared with the previous estimate of 0.5 per cent.

However, since the figures actually show some growth, small though it might be, the Treasury has said that it will continue with its deficit-cutting measures.

A Treasury spokesperson said: "While the UK cannot insulate itself from what is happening to our major trading partners, with financial turbulence in the eurozone and a weaker outlook for global growth, the economy is still growing and this week's survey data for the manufacturing and service sectors are consistent with continued expansion."

Critics point to past figures, however, and given the 0.5 per cent contraction in the final three months of 2010, the new figures actually reveal that the economy has remained static for the past nine months.

Ed Balls, the shadow Chancellor, said: "These deeply concerning figures show the British economy has stagnated since the autumn of last year, well before the eurozone crisis... They show things are even worse than we thought."

Alan Clarke at Scotia Capital said: “What we believe is of more significance, not least for monetary policy, is where GDP growth has been over the last year and where it is going from here. The Bank had banked on some chunky upward revisions to the last year or so and what we have got is the opposite – slight downward revisions!

Some analysts now believe that the pressure is on the Bank of England to back calls for another stimulus into the economy, which could well mean further quantitative easing. Others think that the Bank will hold on until after the publication of third quarter GDP data later this month.

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