Investors have been left fearing for the future of the finance industry after the new coalition government announced plans for radical reforms of the banking industry.

In their coalition agreement document the Liberal Democrats and Conservative outline their intentions to establish an independent commission to review the banking sector to, ‘avoid a repeat of Labour’s financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.’

Conservative chancellor George Osborne and Lib Dem Vince Cable, Business secretary, have the unenviable task of deciding how to rein in Britain’s biggest lenders to avoid what they call ‘casino’ trading.

It is likely that the commission will include central figures from The Bank of England and the Financial Services Authority and their main task will be to look into breaking up the banks by separating the investment banking divisions from the retail sector.

A banking levy is to be introduced  and the coalition agreement also states that the new government   ‘agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector’.

With Lloyds and RBS already partly owned by the state it is likely that splitting up the big British banks would hit Barclays and HSBC hardest  – some fear that they could transfer operations abroad if the break-up is put into action.

However, the new independent commission, once formed, will have one year to produce its report giving the banks some breathing space.

In the meantime the coalition seems to have calmed investors. Tom Elliot, J.P. Morgan Asset Management said: “It may be premature to be calling the bottom for these stocks at present. But their underperformance relative to the FTSE 100 over the last six months suggests that if the new government is able to tackle the deficit without raising fear of a renewed recession, these stocks may well outperform.”

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