It is thought that the ICB, due to report on Monday, will propose that internal ringfences should be put in place to separate the banks' retail and wholesale divisions and that the banks should increase the amount of capital they hold.
The banking lobby has said that doing this would have a detrimental effect on the amount of money that it can lend and that the cost of finance would increase as a result. They have also said that any reforms now would derail economic recovery.
The banks say that ringfencing will remove the implicit Government guarantee to bail-out a bank that is in trouble and that being required to hold more capital will mean that there is less money to lend.
However, in a new paper, ‘Does bank ringfencing automatically mean an increase in the cost of borrowing?', the FSB argues that the guarantee would be removed from the investment banking arm and would remain for the retail arm - the section of the bank that lends to people and small businesses.
And, increasing the capital requirements over the medium term and putting a ringfence in place would be beneficial to the structural resilience of the UK banking sector.
If the ICB suggests that capital requirements are raised to more than 10% for example, the FSB recommends reforms be announced as soon as possible but that the banks be given the course of this Parliament to reach those standards. Funding for this increase can be made up from ear-marked profits and reductions in short term incentivised pay.
Its research shows that one in four (19%) respondents said that they'd seen an increase in the cost of finance in the preceding two months. Of those, 49% said that the cost increased between 2-3%. The FSB does not want to see the banks use the ICB's report as yet another method of increasing the cost of finance to cash-strapped small firms.
John Walker, national chairman, FSB, said: "The banking sector cannot be too big to fail as the taxpayer cannot afford another bank bail-out. The Government has a golden opportunity to reform the banking sector and it must stand by the promises that it has made.
"The recommendations that the ICB make must be looked at closely and the Government must act on them as soon as possible and ensure they are completed before the end of the next General Election.
“The Government must use this once in a lifetime opportunity to make the banking sector safer, more competitive and less burdensome on the taxpayer."
