By Marcus Leach

Any move to ring-fence the UK banks' High Street operations from investment banking divisions would result in a 0.3% decrease in economic growth according to the Ernst & Young Item Club report.

The report also suggested that sluggish growth in the financial sector could undermine any economic recovery.

With the Independent Commission on banking's final recommendations due next week one recommendation already announced is the ring-fencing of retail banks to protect against further financial crisis.

According to the Ernst & Young Item Club the recommendations would end the implicit government guarantee of UK banks, which would result in a higher cost of borrowing on wholesale markets.

As a knock-on effect this would mean large businesses would see the cost of lending increase up to 1.5%.

"These predictions are not based on a worst-case scenario, they're based on moderate assumptions about the extent of ring-fencing," said Neil Blake economic advisor to the Item Club.

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