Reform Changes the Landscape for British Banks

Investors in iShares United Kingdom (EWU - commentary - Trade Now) should keep a close eye on looming financial reform in the U.K. The ETF has nearly 2% of assets in Lloyds Banking Group (LYG - commentary - Trade Now) and Royal Bank of Scotland (RBS - commentary - Trade Now), two of the three publicly owned banks that will be broken up by the government.

The bank shares sold off in London today as the breakup news was absorbed by the market. There was also news of more government funds being poured into the banks, as well as a restriction on bonuses. EWU held its ground, however, and even though the U.K. market lost more than 1% today, EWU shares were flat in afternoon trading, and shares are at about the same level as they finished last week.

Three new firms will be created in the breakup: Trustee Savings Bank, which had been absorbed by Lloyds; Williams & Glyn's out of RBS; and BankCo out of Northern Rock. Assets will also be sold in order to repay the taxpayer-financed bailouts of these institutions.

While it's positive that the decline in bank shares hasn't hurt EWU, investors should be cautious about stepping into the water based solely on these developments -- the impact is indirect and the bulk of the gains will come not in months, but years hence.

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At the time of publication, Dion had no positions in the stocks mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.