Who is to blame for the economic slump?

With the UK economic recovery weaker than expected, new figures from the Office for National Statistics (ONS) show it is the banks who are largely to blame.

The ONS figures show, for the 2.8% fall in the size of the UK economy since it peaked in March 2008, banks are responsible for 1% of this GDP contraction.

The impact of the banking sector on this economic fall is disproportionate to the size of the banking sector as a whole.

Whilst the banking sector is responsible for 5.1% of economic output in the UK, they are responsible for around 35% of the economic decline since March 2008.

This analysis excludes the impact of tighter lending criteria from banks on the contribution to economic growth from small businesses and consumers.

The banking sector has already shrunk by 2.6% this year, following a 5.1% slump last year and 7% drop in 2009.

The banking sector has become something of a national whipping boy in recent years, with taxpayers having to bailout the sector following the global financial crisis.

Reports over the weekend that members of the British Banking Association feel victimised by tighter regulations for the sector expected to be proposed by the Independent Commission on Banking are unlikely to be met with much sympathy.

As much as we collectively dislike the banks, perhaps harsher regulation should be temporarily postponed until we see better economic recovery and the sector is able to do less damage to the state of the national finances.

What we do need however is a less risky banking sector which will not expose taxpayers to the sorts of costs they have already experienced to rescue this troubled industry.

Balancing the need for economic recovery with the need to properly regulate the banks will be a real challenge for government when the Independent Commission on Banking publishes its final recommendations this autumn.