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."
Diving in at the deep end is no excuse for shirking the style stakes
Consumers given power to choose a green deal
'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers
Money Alert: Twice as many young women fall into debt woes
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Relaxed pensions rules: Guide to what they mean to you
- 1 World Cup 2014: 20 things we learned in Brazil
- 2 Why I'm on the brink of burning my Israeli passport
- 3 War is war: Why I stand with Israel
- 4 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square