Love them or hate them, high street banks can have a large effect on our day-to-day lives.

Whether it is simply how convenient or inconvenient getting at your own money can be, or whether you are going cap in hand, asking for a loan or a mortgage.

This is nothing when compared to the influence high street banks have on the UK market, making up approximately 18.5 per cent of the FTSE All Share Index. The banking sector's weighting in the FTSE 100 Index is even larger, with the five largest banks making up more than 20 per cent of the index.

This large sector weighting means that if banks begin to face problems, few investors are able to escape the subsequent decline in the market. So when Barclays announced two weeks ago that it had seen a rise in credit card payment defaults, this admission had an immediate effect on the banking sector, and on the market as a whole. It also overshadowed what had been reasonably good results.

Investors took these results as an indication of things to come and, with the rest of the banks due to report during the next few weeks, all eyes will be on bad debt provisions.

As an economy slows, and when unemployment rises, it becomes harder for people to service their personal debt. This is at a time when it is reported that there is more than £1 trillion-worth of personal debt in the UK.

This debt, and the subsequent interest the banks earn on it, may have helped profits over the short-term, but as interest rates have risen, and as consumers have found it increasingly difficult to cover the repayment costs, the banks may find that their lending policies come under increased scrutiny from shareholders. Although banks have always had to deal with unpaid loans, lending is now at record levels.

The banks have already come under pressure recently regarding some of their practices, many of which are seen as just another way for them to increase their profits at the expense of their customers. This includes charges for the use of cash machines, the time taken for a standard three-day money transfer, and the length of time it takes a cheque to clear.

For years, banks have taken advantage of the fact that most customers are more likely to put up with these additional charges, rather than doing something about it. It is perceived that all high street banks are the same, and it has even been said that so few people actually move their current account to another bank that, statistically, there is more chance of being struck by lightening.

Within two years, customers should be able to transfer funds the same day, and two years later, cheque clearance times will also be reduced. This will prevent the banks making interest on your money during the time the funds are between accounts. It is for this reason that international banks are now seen as a better long-term investment than domestic banks. In fact, the larger the exposure to foreign markets, the better.

Although most UK banks have been increasing their overseas exposure for years, the UK will always have a large influence on their profits. So if other banks report a similar trend as Barclays, the banking sector, and investors, are likely to see things getting worse, before they get better.

* Michael Rankin is an investment manager in the Teesdide office of Wise Speke and can be contacted on (01642) 608855. Views expressed are the author's own and are not necessarily held throughout the Brewin Dolphin Group. Wise Speke is a division of Brewin Dolphin Securities Ltd, a member of the London Stock Exhange, authorised and regulated by the Financial Services Authority. Prices, values or income may fall against investor's interests. You should therefore be aware that you may get less back than you invested. Investments may not always be suitable for all individuals. If you have any doubts, you should consut a professional advisor.

Published: 07/06/2005