Signs of delay to reforms send bank shares soaring

Royal Bank of Scotland surged 6% or 1.5p to 25.8p. Barclays was up 5% or 8.3p at 179p and Lloyds rose 4% at 35.1p or 1.5p.

Traders were relieved after the Government signalled that business secretary Vince Cable, the leading cabinet critic of the banks, now accepted the reforms had to be delayed.

The row escalated as Labour leader Ed Miliband blasted "concerted lobbying by the industry" and insisted there was no excuse for delay.

The Federation of Small Businesses also demanded that reform be implemented soon, dismissing fears that ring-fencing retail banks from their riskier investment arms will hit profits and force them to cut lending.

Andrew Cave, FSB director of external affairs, said: "Since 2008, we've been dealing with the consequences of doing nothing. It's extraordinary that it has been suggested that these important and timely reforms are being put back even further. We think ring-fencing the banks is essential not only to make it safer but also to create a behavioural shift - so that the banks change their behaviour to small businesses. Only 5% of lending is to corporates."

But opposition continued to mount in the City to rapid implementation of Vickers' recommendations, which will not even be announced until September 12. David Frost, director-general of the British Chambers of Commerce, said splitting retail and investment banking must not be rushed through while the economy is so fragile.

"Many businesses are looking for banking reform," he said. "But if any split caused funding to be hit that would be a very poor outcome. Implementing in 2015 may be the least worst option."

He added that the Government should focus for now on using the Project Merlin deal with the banks, reached earlier this year, to put pressure on them to lend.

Treasury select committee chairman Andrew Tyrie and Confederation of British Industry boss John Cridland have also called for Vickers to be delayed. Critics fear the reforms could hurt the City's position as a global financial centre amid signs some banks are already moving operations offshore to avoid tougher UK capital and liquidity rules.

Ralph Silva of research firm SRN Global, estimated the reforms could cut UK bank profits by 10-12%.

However, he said the banks' threats to quit the City looked empty, adding: "The Vickers report is recommending a very soft separation - rather than what Vince Cable was recommending."