Threat of break-ups hits Barclays, RBS and Lloyds shares
Shares in Britain's biggest banks have fallen into the red on warnings of major upheaval under a government-commissioned inquiry into the sector.
Barclays, Royal Bank of Scotland and Lloyds Banking Group were under pressure after Sir John Vickers, chairman of the Independent Commission on Banking (ICB), confirmed in a weekend speech that moves to split retail and investment banking operations were being considered.
He also said big players should be forced to set aside even more capital for emergencies.
There was some relief from the industry that the worst case scenario of carving up "too big to fail" players appeared to be off the cards.
Bob Diamond, new chief executive at Barclays, told MPs earlier this month that subsidiarisation would not make the system safer and could in fact impact the bank's ability to lend.
Around 80% of Barclays profits are generated by its investment bank, Barclays Capital.
In a Treasury Select Committee, Mr Diamond said: "There would be a significant increase in the funding levels for a firm modelled such as Barclays, and that has implications in terms of the capacity for lending as well as the price of lending."
He also stressed that Northern Rock failed despite being a pure retail bank, while Barings went bust in the 1990s regardless of its subsidiarised structure.
Banks are said to be fearful of committing to small business loan targets with the possibility of greater capital reserve and subsidiarisation on the horizon.
There was also another potential blow to the UK banking sector as Ireland looked set for further instability after the Green Party pulled out of the coalition.
Many UK banks are exposed to the Irish economy, particularly RBS through Ulster Bank.
There was a mixed reaction from experts amid concerns over the impact of ringfencing high street deposit-taking operations from investment banking.
Gareth Hunt, analyst at Investec Securities, said while Sir John's message was better than some had feared, it "left the door open to subsidiarisation".
He added there was a risk the ICB may yet look at a full bank break-up under its remit to consider competition in the banking sector - a topic left aside in the speech.
Barclays and RBS would be the worst affected by so-called subsidiarisation, with the impact unclear on HSBC, according to Mr Hunt.
RBS fell 4% and Barclays dropped more than 1%. Lloyds also fell 3% despite having no investment banking division and indications that it may be let off the hook, as the bank had been seen as the greatest at risk of a break-up.