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?
Sunday 17 April 2011
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."
Mark Dampier: 'We're on our own in retirement. They've pulled pensions to pieces'
Donald MacInnes: 'I have to have £500 a month spare from now until at least 2035'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
Crippling PFI deals leave Britain £222bn in debt
Pension freedoms: How to deal with cold calls from scammers
- 2 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 3 Professional big game hunter Ian Gibson crushed to death by elephant during hunt
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...
Day In a Page
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000