LONDON (Reuters) - Radical government reforms to make banks safer should have no effect on their ability to lend to companies and entrepreneurs, Business Secretary Vince Cable said in an interview with Reuters.
Bankers should consider cutting "excessive" pay and dividends before passing on to customers the cost of the plans, confirmed on Monday, for banks to raise extra capital and ring-fence their retail operations from their investment arms, he said.
"If there is a need for banks to invest more to make the ring-fencing effectable, the kind of choices they should be making is whether to reduce their remuneration, which is often grossly excessive, and indeed dividend payments," Cable said.
"There is absolutely no reason whatsoever why it should be at the expense of businesses, especially small businesses."
Cable, a Liberal Democrat, was speaking after Chancellor George Osborne gave his formal approval to recommendations from a government-appointed banking commission.
Cable, who jointly agreed the government's position with Osborne, described the proposals as a "good deal" for Britain.
The Independent Commission on Banking's (ICB) plans, laid out in September, aim to help avoid a repeat of the 2007-8 credit crisis that saw Britain nationalise Northern Rock, pump 66 billion pounds into Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc and suffer a steep recession.
Some banks have argued the cost of the ICB's proposals would hit their ability to lend, countering the government's desire for increased lending - particularly to smaller companies - to boost growth in a still stuttering economy.
Cable said the costs to banks of the reforms - estimated by the coalition at between 3.5 billion pounds and 8 billion pounds - were modest compared with the "astronomical" price Britain had suffered from the financial crisis.
"The banks engaged in some very intense lobbying ... and they have sounded off very loudly, but the die is now cast. We are going to go ahead with this," he said.
Banks will be expected to ring-fence retail operations as soon as possible after legislation is completed by May 2015, when the coalition's parliamentary term ends.
But they will be given until 2019 to increase capital backing to a minimum of 17 percent of assets, as required for the largest banks, and Cable said the government would take care to phase in the rise to avoid it hitting their ability to lend.
"We will have to manage that very carefully, in a counter-cyclical way to ensure that in periods of slow growth and the difficulties we have at present, banks are not put in a position that they would be tempted to lend less to good business customers," he said.
Banks will be given some leeway over whether to include corporate lending and private banking within the protected ring-fence, but Cable denied this would expose a loophole that banks might exploit in consultations ahead of legislation.
"I don't think it is a grey area. We are very clear that the ring-fence needs to be strong and high, but exactly what is in it is a perfectly legitimate issue for technical debate with banks and others," he said.
Cable argued previously for a complete separation of retail and investment banks, along the lines of America's 1933 Glass-Steagall act, but said the ring-fencing would deliver much the same result.
"I argued for a British version of Glass-Steagall and that is actually what we have got," he said. "These recommendations on ring-fencing effectively give rise to that."
(Reporting by Tim Castle; editing by Andre Grenon)