The British Banking Sector - Essay Example

? Recent performance of the British banking sector Table of contents Introduction 3 2. British banking sector – overview and performance 4 2 Characteristics of the British banking sector – influence by the crisis 4 2.2. Recent performance of banks in the British market 5 3. Conclusion 10 References 11 Appendix 13 1. Introduction One of the most critical requirements for firms to enter a market is their ability to respond to the terms of the relevant laws; i.e. the alignment of a firm with the local business laws is a prerequisite for the firm’s entrance and development within a particular market. In the case of the British banking industry, the repeated failures of banks to meet the market rules led to severe losses, a fact which has traumatized the British economy, which is still in a period of recovery. The recent performance of banking industry in Britain is examined in this paper. It is revealed that banks across the country have managed to stabilize their performance, even if the relevant process has not, yet, ended. Another important finding of the research developed for this paper has been the following one: banks which have been well established in the British market have been able to face more effectively the pressures caused because of the crisis of 2007-2009. Also, the support of the state to the banks has been of critical importance for the recovery of the British banking sector, even if efforts are still required for the performance of banks in Britain to be stabilized. It should be noted that the paper is highly based on the material published in governmental and non-governmental organizations. Also, recent articles from newspapers across Britain – worldwide also – have been used in order to show the current performance of banks in the particular country – aiming to reflect the current conditions of the country’s banking sector. 2. British banking sector – overview and performance 2.1 Characteristics of the British banking sector – influence by the crisis Three different bodies control the banking sector in Britain: ‘the Bank of England, the HM Treasury and the Financial Services Authority (FSA)’ (Bank of England, 2011). Each of these bodies has different powers on the particular sector: the Bank of England can control the stability of the country’s financial system, the FSA has certain powers, as described in the Financial Services and Markets Act 2000 while the HM Treasury can overview the performance of relevant legal rules and report their violation, if such activity is identified, to the Parliament (Bank of England 2011). Traditionally, the role of banks in the British economy has been quite important. In fact, banks in UK have been considered as ‘the most respectable organizations’ (UK Banks 2011); however, this was a view related to the pre-2007, i.e. before the development of the crisis. Since the appearance of the global financial crisis, in 2007, the performance of British banks has started to be reduced – this trend is continued, even more slowly, up today. An indicative example of the effects of the crisis on the performance of the British banks has been the following one: because of the crisis the profits of Halifax Bank were reduced by 72%, while in Lloyds-TSB, the reduction of profits reached a level of 70% (UK banks 2011). The British bank less affected by the crisis was HSBC with a limitation of profitability of approximately 28% (UK banks 2000). The effects of the crisis on British banks were controlled through the intervention of the British government (in October 2008) who offered ‘an amount of ? 500 billion’ (UK banks 2011) for helping British banks to exit the crisis with the less possible losses. In January of 2009 the British government offered an additional amount of ? 50 billion’ (UK banks 2011) to support the country’s banking sector. The reference to the above facts is necessary in order to evaluate the current performance of British banks, as explained in the next section. 2.2. Recent performance of banks in the British market One of the most important problems that British banking sector currently faces is that of its credibility. In fact, because of the continuous and extensive losses of banks across Britain, a phenomenon that started in 2007, concerns have appeared regarding the level and the quality of control over the sector’s organizations. This issue is highlighted in a report published in November 2009; in the above report reference is made to an ongoing plan of the British government to overhaul the banks across the country aiming to check the quality of their operational activities – meaning the level at which the local laws on banking regulation have been respected by British banks. The above problem seems to exist today. In accordance with a report published in Independent (March 2011), the credibility of the banking sector in Britain is not as high as expected; in fact, it is made clear that the regulatory problems of the sector may not involve equally in all banks across the country, i.e. the problem seems to be related rather to the sector and not to each specific institution, implying that the existing regulations regarding the British banking industry are quite ineffective. On the other hand, the support of the British government to the British banks has been negatively criticized, as not having the success initially estimated. As a result, the tax system of Britain suffers losses in order for the country’s banking industry to be supported, a problem identified in a report of Guardian in November 2009 (Treanor and Teather 2009). The inability of British government to control the activities of banks has negatively affected the sector, as revealed in a recent report of the Independent Banking Advisory Service (2011); in the above report, reference is made to the practice of British banks to cheat customers, a practice which has been developed at such point that the authorities had to intervene and impose fines – for example ‘a penalty of ?2.8million imposed on a bank for “multiple failures” in its handling of complaints’ (Independent Banking Advisory Service 2011). The above practices are mentioned, as indicative examples of the current trends in the British banking industry. At this point, the following question appears: despite their problems in the past due to the crisis, are the British banks able to recover? The above question will be answered by referring to the current performance of British banks, as identified through appropriate material. In this way, the actual effectiveness of the support provided by the British government – at what level this support actually benefited the UK Banks – could be also evaluated. One of the key problems that banks in UK currently have to face seems to be the lack of competition. In a recent article published by Reuters, reference is made to the claim of the Chairman of HSBC for greater competition (Reuters 2011). It is also noted that the current structure of the British banking sector does not favour the development of banking activities – currently, the British banking industry is characterized by the hegemony (key position on the market) of four banks: ‘HSBC, Barclays, Lloyds-TSB and Royal Bank of Scotland’ (Reuters 2011). In accordance with a report published by the British Bankers Association, the British banking industry is characterized by the domination of six major banks: ‘Santander UK, Barclays, HSBC Bank, Lloyds Banking Group, Northern Rock and Royal Bank of Scotland Group’ (British Bankers Association, 2011). However, the above report refers to the dominant banking groups in the British banking sector in terms of the level of their lending activities, i.e. these are the banks that have developed their lending activities compared to the other banks operating in the specific sector. At the same time, in accordance with a recent report of BBC News (2010) a high share of the British banking industry, about 73%, belongs to the following four banks: “Lloyds, Barclays, HSBC and RBS” (BBC News, 2010). It is clear that the other banks of the industry cannot easily increase their profitability, since, in this way, they would threaten the interests of the above four banks which dominate the specific sector. Another aspect of inequality in competition in the British banking sector is the following one: the operations of the dominant banks are above the income of the state. For example, the case of Barclays, which have managed to reach a level of profits above the country’s income, which means, that one of the following options are available: either the British economy is significantly increased – in order to reach the level of profits of Barclays – or either the operational activities of Barclays are limited (Wilson 2011). Another problem related to the current operations of banks in Britain is their regulation; as it has been noted in a recent meeting of City’s analysts (in March 2011) banking regulation in Britain should be appropriately transformed, in order for the competition of British banks with foreign banks to become more effective (Wilson March 2011). The performance of the British banks from February 2008 – since the effects of crisis made clear within the British market – up to the February 2011 is presented in Graph 1 – Appendix. The above graph shows the performance of ‘the main high street groups, i.e. Santander UK, Barclays, HSBC Bank, Lloyds Banking Group, Northern Rock and Royal Bank of Scotland Group’ (British Bankers Association, 2011). It is made clear that the actual effects of the crisis on the performance of British banks are less than expected. Emphasis should be given on the fact that personal deposits – which are the most important indicators of a bank’s financial strength – have remained at the same level, presenting even trends for increase – from May 2009 up to February 2010. Mortgages also are at a stable level indicating the lack of severe problem in terms of cash flow – banks are able to provide mortgages, which have not particular affected by the crisis. On the contrary, the unsecured lending has been significantly decreased – from February 2008 up to May 2010 – with a recent trend for stabilization (Graph 1, Appendix). Another indicator for the performance of British banks is the level of their approvals – referring to claims for borrowing of individuals and organizations across Britain. It is proved that approvals mostly refer the purchase of house – again, a trend is revealed for backing the loans with an asset. On the other hand, an increase of potential in terms of borrowing is revealed between May 2009 and February 2010. Also, the level of remortgaging has been kept at rather stable levels, from February 2009 up to February 2011(Graph 2, Appendix). As noted above, the British banking industry is characterized by a high concentration; initially, the country’s major banking institutions have managed to face the crisis; however, gradually their profitability has been reduced, negatively affecting the level of the loans that these institutions provide to the public. This fact is understood through the Graph 3 (Appendix) where the decrease in 2009 in loans provided by the country’s major banks is made clear. The limitation of the loans provided to the public (individuals and businesses) by the British banks would be possibly related to the decrease of the level of their assets from 2007 up to 2009, as presented in Graph 4 (Appendix). Moreover, in accordance with the figures presented in the Graph 5 (Appendix) where the financial results of British 5 major banks are presented, the performance of banks in Britain has been influenced by the recession but not fully; certain of these banks, i.e. Barclays, Lloyds and Standard Chartered have increased their profits in 2009 (compared to 2008), a fact that indicates the perspectives for growth of the British banking sector – despite the strong pressures in the international financial market. The above view is also verified by the trends in mortgage lending, as presented in the Graph 6 (Appendix), which was published by the Bank of England. It is clear that mortgage lending was decreased in Britain up to January 2009; however, since then, its level is standardized, a fact that proves the gradual limitation of the influence of recession on the British banking sector. Reference should be made at this point to the following facts: a) the standardization of the performance of British banks is not accepted by all country’s economists and analysts; in fact, the view that the country’s banking sector is still threatened by the global recession is strong – a fact which is reflected to the recent decision of Standards & Poor to downgrade British banks (Winnett 2011); b) British banks have managed to reduce risks related to the recession by closing their branches, a fact which has been negatively criticized by the media and the press (Coney 2010), c) there are British banks which have managed to face the crisis by using practices which are not fully justified with existing law – for example, Barclays – causing the complaints of their customers (Jordan 2010); d) another practice used by the British banks in order to survive through the crisis has been the elimination of part of their customers’ debt (Individual Voluntary Arrangement 2011), a practice which has helped the British market also to confront the crisis. 3. Conclusion In accordance with the issues discussed above, the performance of banks in Britain has been strongly affected by the crisis. The fact that the Bank of England carefully monitors the country’s monetary policy has not particularly helped to avoid major losses, as proved through the figures presented above. The above fact led to the following assumptions: a) the regulation of banks in England should be improved; the severe losses of these institutions have negatively affected the performance of the British economy, as proved through the measures that the British government had to introduce for the control of the crisis, b) the terms of coordination between the banks in England and other countries worldwide should be reviewed; the recession proved that banks in the specific country are highly depended on the performance of USA banks, a fact that in the case of the crisis of 2007 was proved critical for the expansion of crisis in England. In accordance with the above, the performance of British banks seems to be standardized, despite the crisis. Moreover, it is proved that the support provided by the British government have helped British banks to face the crisis limiting their losses. However, at this point, another problem has occurred. The power of the dominant banks in the British market has been increased at such levels, that the stability of the British economy is threatened. It is for this reason that the British banking Commission examines the case of breaking the sector’s dominant banks (Treanor 2011). This plan has faced the opposition of the country’s political parties, which consider such initiative as a threat for the British economy (Treanor 2011). From a similar point of view, the development of plans that are based on the increase of the power of banks above the national economy, can destroy the country’s position in the global market (Reece 2011) – giving the impression that the control of British economy belongs to foreign financial institutions, an issue which is not true, taking into consideration the financial strength of British banks. It is made clear that the performance of British banks affects the national economy in many different ways; regarding their financial status, British banks can be characterized as quite powerful, having been able to confront the global crisis, even if this target has been achieved mostly because of the immediate reaction of the British government. References Bank of England (2011) “Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority” < http://www.bankofengland.co.uk/financialstability/mou.pdf> BBC News (2010)”Lloyds boss rejects calls to break up UK banks”. Web. Available from British Bankers Association (2011) Coney, J. (2010) “Fury over Britain's vanishing banks” Mail Online. Available from Dealbook (2009) Britain Plans Overhaul of Banking Industry. Web. House of Commons Papers (2009) Financial Statement and Budget Report: Budget 2009: Building Britain's Future. London: The Stationery Office Independent Banking Advisory Service (2011) Banking News & UK Comment 2011. Web. Individual Voluntary Arrangement (2011) Banks in Britain write off ?3.47 billion of debt. Web. Available from Jordan, C. (2010) “Britain’s worst banks” Web. Available from KPMG (2011) Banking Peformance Benchmarking Survey Reece, D. (2011) Independent Commission on Banking could destroy London's place as top financial centre. The Telegraph. Reuters (2011) HSBC says important to boost UK banking competition. Web. < http://in.reuters.com/article/2011/02/01/hsbc-britain-competition-idINWLA422920110201> The Independent (2011) David Prosser: An industry that is even less trustworthy than the banks. Web. Treanor, J., Teather, D. (2009) A ?39bn handout – and the great British banking sell-off begins. The Guardian. Web Treanor, J. (2011) UK Banking Commission will Consider Breaking up Nation's Biggest Banks. Web. < http://www.commondreams.org/headline/2011/01/22-7> UK Banks (2011) Web Wilson, H. (2011) UK banks could lose business to rivals within months, warns HSBC's Douglas Flint. The Telegraph. , Wilson, H. (2011) Banks up the ante ahead of ICB report: hollow threats or endgame? The Telegraph. Coney, J. (2010) “Fury over Britain's vanishing banks” Mail Online. Available from Appendix Graph 1 - Performance of main high street banks (Source: British Bankers Association) Graph 2 – Rate of approvals by British banks (Source: British Bankers Association, Statistics, 23 March 2011) Graph 3 – Level of loans provided by the major banks in Britain, for the years 2007-2009 (Source: KPMG, 2011) Graph 4 – Level of assets of major British banks (from 2007 up to 2009) (Source: KPMG, 2011) Graph 5 - Performance of banks in England – comparative data, for the end of 2008 and 2009 (Source: KPMG, 2011) Graph 6 – Mortgage lending in Britain – from Jan 2007 up to Jan 2011 (Source: Bank of England, 2011, http://www.bankofengland.co.uk/publications/other/monetary/trendsinlending.htm) Read More