Banking Failures in the UK - Essay Example

? Research Proposal The proposal illustrates the impact of banking failure and significant interventions of regulatory system in the United Kingdom. It also determines in depth analysis of the historic banking failure, emergence of corporate governance and role of regulatory environment of United Kingdom in shaping the financial intuitions. The economic downfall of 2008/09 have severely affected the banking system and have raised the concern of the government to form a single tier body which could monitor and access the financial intuition of the United Kingdom. 1. Research Background The research is based on the recent International financial crisis of UK banking system 08/09, which failed to adhere to existing financial and national regulations. The significant impact of shadow banking system that facilitates complex financial structures, derivatives and asset securities have resulted in extreme trading risk as compared to the normal banking operations. The banking system is regulated by the competition commission, which summon operations of the banks towards a complex monopoly for banking giants as compared to the smaller banks (Buckle & Thompson, pp. 333-345, 2005). Banking failures are termed as shutting down the operations of the bank due to inability of paying of its depositors or have lesser funds to meet its creditors and regulators obligations. The distributions of its assets and liabilities are evident due to insolvency of the bank which implicit that its assets are undervalued as compared to its liabilities at market value (Thomas, 2003). The banking regulations are accredited by three organisations mainly FSA (Financial Services Authority), Treasury and Bank of England. The interventions of the regulators were limited to aggressive situations only but since the banking crisis, the regulators are alarmed with the current regulation system. The most critical drawback for increased regulations in United Kingdom is enforcement of international banks to operate in lesser regulated environment offshore. This could result in a huge impact on the employment and financial institution of the country and across the globe (Buckle & Thompson, pp. 333-345, 2005). The banking system is adhered to principle based approach as compared to the U.S rules based regulatory system. The FSA regulates promotion of efficient and rational financial services to its consumers and to achieve its objective, it ensures standards are in place for the operational activities of banks and financial institutions (Buckle & Thompson, pp. 333-345, 2005). The banking stability in UK is adhered to the Banking Act (2009), which implicit that influential organisations can be held responsible for taking control over the bank in midst of crisis and banking regulations (Parliament, 2010). It also stimulates that in case of bankruptcy of failure of banking system the ownership is controlled under public or government organisation such as Bank of England and Treasury. This has led in recent downfall of financial institutions like Northern Rock, which was rescued by the Bank of England and later on sold to Virgin group. This could be termed as failure in banking system of the oldest British financial institution during the 08/09 financial crunch (Buckle & Thompson, pp. 333-345, 2005). 2. Literature Review The British Banking system has been subject to prudential regulations for quite a long time but is now affirmative in accepting a shift to integrated system, which divulges a single regulator controlling the entire financial intuition sector. According to Buckle and Thompson (2005), the banking failure was apparent since the Great Depression of 1920 when numerous banks and financial institutions collapsed due to failure of regulators and lack of compliance of banking legislations. The British banking sector was not affected with the major crisis until 1973, when Bank of England rescued several secondary banks that were strongly depended on heavy deposits due to intra-bank market. The rescue operations for lending was executed by the Bank of England, which also further acted as transformation of Banking Act (1979), which implicit regulations powers and supervision entirely to the Bank of England (Parliament, 2010). The advent of banking failure started since Johnson Matthey Bank (1984), which was purchased by the Bank of England as a lifeboat operation and further reselling it due to evident fear of bankruptcy. JMB was also accused in fixing gold bullion prices in the market which was one of the major reasons of its global collapse. The bank rescue operation preceded by the Bank of England was executed but lacked support from the clearing banks to persuade commercial assistance. The failure also highlighted lack of supervision and moral attitude of banks that were affirmative that Bank of England will rescue them in case of failure. The incompetence of the management and the auditors along with lack of compliance and breach of guidelines also act as a catalyst in insolvency of the bank (Bank for International Settlements, 2004). The second most significant failure was acclaimed in history by BCCI (Bank of Credit and Commercial International) in 1991 that was a major collapse in relation to lack of regulations, competence by management and severe allegations, such as money laundering. Fraud and failure to comply with the regulators were the main reason for the demise of BCCI, while risk of operational failure was the reason of JMP (1984) and Barring Banks (1995). The complex group structure acted as a catalyst for lack of monitoring and supervision by the regulators (Bank for International Settlements, 2004). Barring Bank (1995) highlighted the failure of internal and audit process due to failure by regulators and senior management. The evident of fraud and market risk were also major reasons in failure of the banking group. It was argued that market risk could be catered through balanced currency positioning and reasonable interest rates while insolvency risk can be managed through maintaining appropriate current ratio failures (House of Commons, 2009). The tripartite regulatory system of the UK financial institution failed utterly due to lack of control, authority and responsibility to access and monitor the entire system. The literature depicts that macro-prudential risk was evident due to pitfalls in the regulatory system failures (House of Commons, 2009). 3. Research Objective The fallouts and failure in regulations have clearly highlighted that financial crisis are widespread and can be carried out widely at expense of public funds with lack of coordination by the government regulators. The high profile failures in banking industry and crucial shortcoming have given air to lack of authority and framework in the UK banking system. To undermine a stronger and qualitative financial system, transparency and supervision along with management best practices are required for reducing the impact of further financial demise (Thomas, 2003). The following objectives are set and analysed in the research which are prudent as follows: 1. To analyse the need of regulatory framework for the UK banking system in order to ensure financial stability and reduction of usage of public funds for recurring crisis. 2. To determine the effect of corporate social responsibility and ethics hazards on the banking system and regulators to mitigate banking failures (House of Commons, 2009). 4. Research Questions Following research questions are determined in accordance with the desired research objectives: 1. What is the impact of regulatory framework on UK banking system? Does it protect the financial stability of banking and financial institution of banking system? 2. What are the significant impact of corporate governance and ethics in preventing banking failure in UK financial system? 3. What are the preventive measures for safeguarding the public interest and banking regulatory system of the United Kingdom? 3. How can shadow banking have a favourable and adverse effect in establishing an appropriate framework for banking industry of United Kingdom? (House of Commons, 2009). 5. Research Methodology The gathering of data and setting up a specific technique to undermine research is termed as methodology. The technique and tools used to reach a specific research objective is essential for undermine the research aims and objective. The methodology is either concentrated as argued by Thomas (2003) for qualitative or quantitative research methods. Quantitative methods focus on analysing the data through statistical analysis technique and quantifying the result obtained whereas qualitative analyses the data collected by observations and interviews that facilitates a descriptive research outcome. The data collection will be segregated into primary and secondary research. The primary research focuses on the most recent and updates information for the research. It comprises of conducting face to face interviews, surveys, phone calls, observing the environment and the current scenario of the research background. It is also the most authentic and accurate source of first-hand information, necessary for the research. The secondary research focuses on obtaining past information on research background that includes gathering data from books, journals, database, e-journals, annual reports etc (Elo & Helvi, 2007). 5.1 Reasoning for choosing the Methodology The research methodology chosen for the topic is qualitative research because it enables to undermine in depth analysis of the research objective and questions. It is difficult to gather statistical data and carry out the quantitative research on the topic due to lack of time and proximity of expensive (Thomas, 2003). The reasoning methodology applied to qualitative analysis will be inductive as it caters to analyse the subject matter on a broader perspective, which enables to test different theories and come up with an appropriate reasoning or solution. The inductive reasoning also enables to undermine a specific hypothesis to test. It is a more convenient way as it gives wider approach to the author to test different existing and current theories and hypothesis in accordance with the research objectives (Elo & Helvi, 2007). 5.2 Primary Research An appropriate framework will be developed to analysed different theories and data collected through primary research in order to access the authentic and accuracy towards obtaining the research objective (Elo & Helvi, 2007). The primary research will based on content analysis philosophy that undermines a systematic approach in analysing different sets of theories and determining valid interferences from the context data. The purpose of the context analysis is to determine a conceptual framework or system that undermines different theories in context to the research objective. It is simpler and less time consuming as compared to statistical interferences. The method can be misleading if the author is unskilled in analysis techniques (Elo and Helvi, 2007). To undermine inductive content analysis, the author gather data and form a theoretical analysis on three steps mainly open coding, establishing categories and determining abstract theories (Thomas, 2003). 5.3 Secondary Data The data collected from secondary sources such as books, journals, reports, online blogs etc. will help to gather information regarding past practices and historical reference over the research background. The data will be essential while using the content analysis techniques in order to determine specific theories and framework. It will also enable readers to determine the transparency; authenticity and accuracy of the data which will not only reflect the current market situation but will also refer to the past best practices in the scenario (Thomas, 2003). 6. Timescale The time duration for the entire project is essential, should determine that the research conducted by the author is qualitative, cost benefit, and achieved within the time parameters. To determine the time and task different project management tools can be used to analyse the progress of research over the time. The research is very informative for banking regulators and consumers understanding the downfall of previous banks in the United Kingdom. The study is limited to UK only; therefore, the entire project is marked under three months and two weeks’ duration. A systematic approach of collection of data, analysis of data, constructing abstract, theories and framework from the obtained data, determining hypothesis for further research, recommendations and conclusion will be illustrated for achieving the above mentioned research objective (Elo & Helvi, 2007). Works Cited Bank for International Settlements. “Bank Failures in Mature Economics.” Basel Committee working papers on Banking Supervision. Switzerland: Basel, 2004. Buckle, Mike and Thompson, John. The UK Financial System: Fourth Edition. Manchester: University Press, 2005. Elo, Satu and Kyngas, Helvi. The qualitative content analysis process. JAN Research Methodology. Oxford: Blackwell Publishing Ltd, 2007. House of Commons. Banking Crisis: regulation and Supervision. Treasury Committee. London: The Stationery Office Limited, 2009. Parliament United Kingdom. A new approach to financial regulation: judgment, focus and stability. London: The Stationery Office Limited, 2010. Thomas, R. David. “A general inductive approach for qualitative data analysis.” School of Population Health. New Zealand: University of Auckland, 2003. Read More