The biggest shakeup of the UK banking sector in more than 25 years was announced on Monday in London, with the Government moving quickly to support the plan.

Chancellor George Osborne led the chorus backing a review by the Independent Commission on Banking (ICB) into the sector and in particular its widely anticipated conclusion that banks must completely split their retail and investment arms to protect taxpayers from future crises.

In fairness, a lot of the recommendations in the 358 page ICB report, led by Sir John Vickers, appeared to merely rubber stamp what many banks are already in the process of undertaking in line with Basel III requirements – that is with one, critical exception.

The ICB has gone one step further and called for the ‘ring-fencing’ of banks, essentially a more drastic move than having Chinese Walls between certain banking divisions but rather a fortified Berlin Wall akin to what enveloped the Western part of the German city for more than 25 years.

Well not quite, but banks will have to operate different boards of directors and maintain 17%-20% of loss-absorbing capital.

The plan is for any future crisis affecting the investment arms of banks to be borne by the bank’s bondholders and not taxpayers. This triggered a sharp sell-off in bank debt on Monday.

The news is the biggest change to Britain’s banking sector since the ‘Big Bang’ deregulation of 1986.

Support for the ICB plan was given across the board (apart from the banking corner of the ring of course) but this is understandable given the immense bill taxpayers were compelled to foot in bailing out perceived greedy bankers during the crisis.

One can appreciate the severity of the public distaste for the sector considering the amount dished out to prop up the then over-extended Royal Bank of Scotland alone would have funded Britain’s university system for five years – an amount of funding that seems an even bigger slice of change in these times of austerity.

The timeline of 2019 to implement, at an estimated cost to the banking industry of between £7billion and £9billion, did not trigger panic in the markets, despite Osborne indicating the Government would seek to push the plan through as legislation as soon as possible.

With problems in Europe still mounting and sovereign debt crisis fears, across the channel in France, there was a huge sell-off in banking stocks at the beginning of the week, with the likes of Societe Generale, BNP, and Credit Agricole all hammered.

It was strange then that despite the very significant announcement back in Britain, the banks were left alone by the bears, recording only marginal share price falls.

An explanation for this could be one of two things, perhaps?

Explanation 1; It could be that markets had already priced in the news for banks such as HSBC, Lloyds, Barclays, and RBS – given  their share prices have already been decimated this year.

Explanation 2; It could just be that the markets believe that by the time 2019 comes around, the banks will be healthier and back to their money printing ways.

Positively for the tax-payer, this burningpants correspondent believes it to be mostly a case of 60% explanation 1, rather than explanation 2, which we guess accounted for 20% of the reasoning.

However, this only adds up to 80%.

The reality is that 2019 is a long way away and there are bigger issues to deal with today.

So we have added in a third explanation to explain the final 20% of the market’s reaction, namely that investors have bigger concerns about the moribund growth of the UK economy, which is putting pressure on banks to deliver growth and shareholder value, hence the fact RBS and Barclays have already seen their share prices drop by more than 50% over the past year.

This, however, is not a concern for Mr. Vickers and Mr. Osborne. Their chief interest is that never again will British taxpayers be called upon to pay for banks that are too big to fail.

If investment arms take risks and those risks turn out to be grossly detrimental then bad luck to those investors involved but it certainly won’t require money that could be directed to more public services and needs.