Fund managers believe Barclays, HSBC and Royal Bank of Scotland are the UK banks most likely to suffer if the latest US plans to curb risk taking in the sector are effected.
Yesterday, Barack Obama proposed banning US banks owning, investing in or sponsoring hedge and private equity funds, and from conducting inhouse trading.
Matthew Hudson, manager of Cazenove's UK Equity Income fund, says banks in the UK investment banking arms exposed to the US, such as Barclays, HSBC and RBS, will bear the brunt of regulatory reform.
By mid-morning, Barclays was down 5.7% to £2.66 while HSBC fell 2.7% to £6.57 and RBS fell 5.6% to £33.4p.
Hudson says: "Reducing the size of prop trading activities, and activities in private equity and hedge funds will impact investment banks more than retail and commercial banks. We have already seen that in the US, with retail banks doing well."
Hudson says if UK politicians follow this lead - with the Tories indicating they would - HSBC's "global reach will make it easier for them to move overseas".
Alliance Trust Asset Management warns Credit Suisse, UBS and Deutsche Bank in Europe could suffer too.
Tim Gibbens, global financial analyst at Alliance Trust Asset Management, says own-account trading only accounts for about 2-3% of profits at large US banks, although Goldman Sachs is believed to derive about 10% of profits.
Gibbens says: "The proposals around private equity and hedge funds will probably have a bigger impact on US banks, and could force integrated operations like JP Morgan Chase & Co and Bank of America Corp to dispose of their operations in that space."
However, he adds Congress will probably dilute Obama's plans. "There is a feeling they do not tackle the core issues that led to the crisis such as easy credit, overly complex instruments and lax ratings agencies."
Tim Roberts, fund manager at Cavendish Asset Management, says the proposals "go far beyond what the markets can stomach from the volatile banking sector, and the creeping political tenor of financial debate".
Meanwhile, Matthew Strachan, head of Alliance Trust's North American Equity fund, favours US regional banks such as New York Community Bank.
"The regional banks have risen by about 2.5% [on the news] whereas investment banks are down 6% or 7%."
Strachan divested from all US banks in 2006 over "concern about a lack of transparency and the amount of leverage being introduced into their model".
