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Spend & Save

How the IBC's new bank rules will affect your wealth

There are winners and losers in the banking commission's interim report on reform, but what does it mean for the investor?

You may be one of those people who simply hates the banks, and, frankly, who can blame you – what with greedy and unfair overdraft charges, mis-selling of dodgy payment protection insurance, fat bonus payouts or the fact that their actions brought the West to the brink and sparked the biggest recession since the war.

But, whatever your feelings, you undoubtedly own banking stock. You may have a broker's account with bank shares, or a unit trust fund, which is likely to have financial stocks. Even a pension makes it very likely you own a bit of the banks. And last, but by no means least, as a taxpayer, the Government on your behalf owns huge stakes in both Lloyds and RBS.

So last week's Independent Banking Commission report, headed by Sir John Vickers, into the reform of how UK banks operate, can't help but affect your wealth.

It may only be an interim report, but the IBC's proposed reforms to the UK banking system have all the hallmarks of a done deal. The long-awaited report into how to prevent a 2008-style banking crash happening again called for substantial, but not overly radical, surgery of the UK's flagship financial sector.

The initial response of stock markets and City insiders was dictated by what wasn't in the report rather than what was. "Stock markets have responded with relief as the report concluded that the big banks don't have to separate investment banking operations from retail operations," said Adrian Lowcock from Bestinvest. But banks and their so-called "casino operations" won't be allowed to carry on as they did pre-crash. Instead, the IBC wants some strict regulations put in place to protect depositors, so that a bad bet from an investment-bank arm of a major bank won't lead to the cash machines running dry or savers being unable to get their money back, as so nearly happened in the autumn of 2008.

In future, banks should hold more cash on deposit – preventing them from going overboard on their lending, and the investment and retail arms should be ring-fenced. So if the investment-bank arm of a bank fails it doesn't mean ordinary depositors get sucked into the vortex. But, crucially, this separation of investment and retail banking doesn't mean that the likes of Barclays, RBS or HSBC have to sell off their casino operations.

"A lot less came out of this report than was perhaps first expected, and for most of the banks this is quite good news," said Nicolas Ziegelasch, an equity analyst at broker Killik & Co.

So presumably this is good news for the taxpayers and direct investors in banks? "It is a good thing that banks have to improve their capital ratios – this will effectively mean you won't see banks making £6bn a year in profit, but the quality of earnings will be superior for investors, something they can rely on," said Peter Baum, director of portfolio management at Glendevon King Asset Management.

But not all the banks fare the same out of the IBC report. "If I were drawing up a list of winners and losers, I'd put Barclays and RBS – because they won't have to hive off their investment-banking arm – as big winners in this. I'd put HSBC and Standard Chartered as fairly neutral because their investment arms can operate in the Far East, and HSBC after all makes some £2bn of its £18bn revenue in the UK. Lloyds and its shareholders are the major losers," Mr Ziegelasch said.

Lloyds is considered the big loser because the IBC would like it to sell off more branches to reduce its stake in the UK current-account market. Said Mr Baum: "I am staggered at the mealy-mouthed approach that Vickers and the IBC has taken over branches. If I were a Lloyds shareholder I'd have been mullered when it got coerced into taking over HBOS by the Government, and they're now being told, 'thanks for getting HBOS out of mire, now we are going to dilute the bank by making you sell off loads of branches'."

Mr Ziegelasch said forcing Lloyds to sell off branches could erode its strength: "You've got to feel for Lloyds shareholders. Their shares were worth much more before the HBOS deal, and the bank was AAA rated. They go through all this pain and the bank seemed likely to be in a position to pay dividends again and now they are hit with this. The Government [may] have to back the sale of the branches with funding, and, crucially, it is weakening Lloyds' overall cash position, which is going to make it tougher to repay what the taxpayer has invested in the bank."

More generally, though, could the fetters placed on the banks by the IBC report damage the sector's international competitiveness? "Overall, the report is not a negative for UK banks but there are wider issues that investors have to take account of," said Gautam Batra, chief investment officer of Signia Wealth. In particular, worries over the UK economy and the eurozone are potential red flags.

"We are cautious on the UK banking sector because it hasn't marked down its assets as aggressively as, say, the US, and we are entering a difficult period for the UK economy as well as substantial worries over Spain – a close trading partner of the UK and intertwined in the UK banking sector – as well as the eurozone sector as a whole."

Nevertheless, overall, Mr Baum views the IBC report as a positive for shareholders. "If I was a first-time share investor, following this report I would definitely be buying shares in UK banks."