Overview of the England Banking Industry - Case Study Example

Banking Industry UK Banking Industry Introduction The banks operating in the United Kingdom (UK) have their services refined thoughmost of the services they offer tend to be similar. The distinguishing factor of these services is the interest rates that each of the banks offers. Recent trends indicate that the banks do not place adverts on the interest rates that they offer. Through this, the banks aim at avoiding scenarios where they have to off the advertised interest rates to the majority of the clients (Batty & Ricketts, 2014). Overview of the England banking industry The Office of Fair Trading (OFT) realized in 2006 the banks exploitation of penalty related to bank charges on the customers’ credit cards. In turn, they suggested the restriction of such charges to a particular maximum amount. The charges are prohibited in the UK contracted laws. They can only be effected in the situation where the contract is a representation of real cost and has been breached through unauthorized level of overdraft or even when the cheque has bounced. The OFT ruling was extended to the clients bank accounts and quite a number of customers flooded several cases of having been culprits of the penalties that were illegal. As from 2008, the short term liability of the banks in Britain has been equivalent to 156 percent of the GDP of Britain. On the other hand, the ratio of average leverage is 24: 1 in terms of assets to net worth (Kern, 2012). One of the main developments of the financial services in the UK is the Britain Reform of 2014. The reform advocates for changes in the principles that the US had adopted which entailed strategic averse risks. Its manifestation is in the form of the retail banks protecting the consumers. In addition, it entails the creation of requirements for certain or specific capital that is to be retained. During instability in the market, this amount of capital retained acts as a buffer. The aim of the reform is to strengthen the economy that was weakened during the economic crisis of 2008. The banking system of the UK is relatively big and this could be a challenge to the industry. The industry has been growing dramatically in the past decades and it is assumed that its growth could be continuously rapid. The big size of the industry can be attributed to its international stature and nature. Foreign banks form a large part of the banking system of the UK though the UK banks also operate largely in other foreign markets. Numerous firms and individuals have been located in clustered form where they are near to each other hence the financial systems have benefited from this phenomenon. Therefore, the banking systems in the UK have the leverage of providing efficient banking services in comparison to other nations or rather; it has a comparative leverage over other international banking services. In the 18th and 19th century, London emerged as the world’s financial centre. The government subsidy has been quit implicit in reference to the big banks with little chances of failing which has the potential of oversupply of services related to banking in comparison to the amount beneficial to the community or the society (Quarterly Bulletin, 2014). In regards to the perspectives of the England banks, it is vital for the Prudential Regulation Authority and the Financial Policy Committee to comprehend the extent of the importance of the banking system in the financial stability. The financial stability is important for the banking systems to be resilient. Some economists argue that the size of the current banking system in the UK is a representation of a material risk to the stability of the economy hence measures should be incorporated to minimize the size. The recent prolonged impact of the economic crisis has been the sole reason for this particular position. For the UK to safely host expanding and large financial sector, reforms that are comprehensive are crucial to for its resilience in both the international and domestic market (Quarterly Bulletin, 2014). The size of the UK’s banking sector This is examines through the measurement and evaluation of the sum of the assets on the balance sheets of the banks. The assets entail the loans to companies, households, securities such as equities and bonds among others. The ownership and residency basis are some of the factors that are often employed to define the size of the banking industry and it is applicable to the UK. Ownership in this context encompasses monetary financial institutions in terms of total assets that the UK owns. It entails the assets of the branches of non-resident and subsidiaries exclusive of those owned by foreign banks. On the other hand, residency basis are the monetary financial institution assets within UK irrespective of the owner’s nationality. It is inclusive of the assets of the banks owned in UK and those of foreign banks. The UK has the largest banking system or sector in comparison to other countries such as the US in reference to the residency basis. The other factor that illuminates how big the UK banking system, is that foreign banks are quite large in the UK market or the banking system. For an instant, there are approximately more than 150 foreign branches that take deposit and about 100 taking foreign subsidiary deposit in the UK. On the basis of residency, the foreign banks contribution is roughly half to the UK’s banking assets. The third factor contributing to the large size of the banking industry in this country is that loans that are non-assets contributing highly to the banking assets of the UK (Quarterly Bulletin, 2014). The banking system has the potential of becoming bigger than it is currently. However, to postulate this phenomenon, the trajectories of the economic integration on the global scale have to be considered. Decisions made by key stakeholders concerning strategy, innovation and other relevant aspect that have shaped the nature of the banking industry in UK The possibilities of banks collapsing due to mismanagement are often high. The banks of UK have the board of directors who play a vital role in balancing the interest of the stakeholders. The regulators of the bank often add roles and responsibility to the board of banks which in most cases are usually detailed in terms of the practices of the boards making decisions and aims that are strategic. Greenham (2013) argues that bank regulations are like substitute to corporate governance. The regulators in this context advocate for the interest of the public which is inclusive of the interest of the stakeholders. The regulators ensure that the banks comply and conform to the legal and regulatory responsibilities. There are quite a number of stakeholders who are different and are interested in the UK banking sector. These stakeholders include the customers, regulators, depositors, investors, politicians, taxpayers, directors and bank staffs. These stakeholders have varying powers hence some interests can be advanced at the expense of the other stakeholders. The powers of the regulators inclusive of the politicians have been increasing while those of the directors, shareholders, and staff in have been gradually receding (Greenham, 2013). Traditionally, the directors have enjoyed the privileges among the shareholders. However, every stakeholder has an interest in the functioning of the system of banking. They do not operate in isolation (Batty & Ricketts, 2014). The bank investors can be the holders of debt, equity holders, and those who fund the banks. They have a converging interest not only in the effective and efficient governance of the financial system but also in the management. However, their tolerance to risks differ since each of usually seek returns that act as compensation for the likely risk to be incurred. It is quite difficult on the practical aspects to examine the returns and the risks incurred. It is also difficult to evaluate risks, as well as the anticipated returns due to the uncertainty of the changes in the regulations of the banking system. It can consequently result into paralysis of investments inclusive of the greater risk premia. Investors tend to be cognizant with making decisions when confronted with uncertainty of conditions. The processes that result into changes that are regulatory are often characterized by uncertainty (Kern, 2012). Alternatively, the regulation of the banks can be ‘ossificated’. The equity investors usually employ a model of target (which is the ratio of price to book) evaluation for the bank share depending on the anticipated return on equity relative to the cost of equity that has been estimated. The bank leverage changes influence the ration highlighted above thus making it a hard nut to crack on how the changes of the leverage is likely to equity investors. When the leverages are extreme, the uncertainty level for the bondholders and funders will escalate above the tolerance of their investments. This has a negatively impact on the shareholders especially in the banks that have been affected. Sometimes, the stakeholders either seek or resist change if they perceive that there is unacceptable and unfair balance of power among the stakeholders. In a situation where the powers of an investor is low to the extent that the returns are not aligned with the risks the investor will in turn have the leverage of making a decision to invest in other ventures or assets. In addition, they can opt to not investing new shares, instruments for funding, and bonds that are issued. This has the potential of causing the problems of regulation, business, and liquidity for the banks. This requires the need for the interest of the stakeholders to be balanced. This may encompass the regulations that are acceptable, social and political environment for the bond investors, funders, and equity investors. In turn, the uncertainty of the investors is likely to be in the form of risk premia. As the power balance among the stakeholders’ changes, the premia varnishes. The banks providing credit is vital to the global economy and this needs banks that are strong which in turn depends on the investors. However, it is quite complex to balance the various stakeholders of the banking systems through the bank regulations, strategies, and the structure of the capital. The government on the other hand, has also significantly shaped the banking sector or system of the United Kingdom. Through its parliament, legislative the government provides legislations that are key in the operations of banks (Batty & Ricketts, 2014). One of the financial regulators in the UK is the Financial Conduct Authority. Financial Conduct Authorities (FCA) is one of the bodies that have significantly shaped the industry though its regulation standards and measures. The financial regulation has the role of influencing the principles of corporate governance. The body has the mandate of providing protection to the consumers, promoting integrity in the market for financial institutions, and promoting competition in the banking business arena (FCA, 2013). The FCA has the responsibility of creating, regulating the environment of the financial services through the provision of conducts that are supportive of the acceptable behavior in the financial system of the UK. The authority’s risk based approach encompasses the identification of the risks that are either emerging or current and asses these risks to the firms and consumers. FCA also identifies the existing risks related to the failures in the market which have the potential of hampering competition in the market. In order for the FCA to support their authorization enforcement and supervision of its functions, it develops the comprehension of the issues and risks in relation to the financial market. In addition, based on the knowledge of this regulatory authority, it makes polices that are based on evidences which have the potential of changing behavior (FCA, 2013). FCA also consistently manages, and mitigates risks by making decisions based on the risk based approach. The principles and standards for the assessment and measurement of risks are also carried out by the agency (FCA) for the purpose of regulating financial institutions such as banks. Through the extension of their regulatory services to the protection of the consumers irrespective of the financial circumstances or age, it exercises his powers protected by the legislations to ensure that the financial market work. This restores the confidence of all the players in the financial sector, as well as promoting competition for the sole purpose of benefiting the consumers (FCA, 2013). There is a trust deficit in the UK banking industry. The confidence of the shareholder, customers, the government, and the regulators should be regained. To accomplish this, leaders need to be engaged as role models. The leaders are directly responsible for the bank standards, besides influencing the behavior and culture at all levels. According to the Accenture survey (2014), 40 percent of the consumers perceive the UK banks to be ethical, 50 view the banks to be fair while 52 perceive them trustworthy. The success of this industry depends on the engagement of the leadership, the alignment of the organisation, development of competence, behavioral change, and measurement of the outcomes. The model of the banking business should commensurate or rather be aligned with human resource, organisational, and risk processes. This entails the creation of an environment that is conducive for the performance of the business. The UK’s banking system is not sufficiently competitive since it is highly concentrated. This presents three challenges. The first one is the overstating of the concentration with the assumption that the banking sector in the UK comprise of a single market instead of many markets. Secondly, the concentration is an implication of competition while the next encompasses on the right ways of promoting competition is through the breakup of hindrances instead of the encouragement of entrants. The banking system of the UK integrates several product markets that are separate and competition emanate from different competitors and areas (Greenham, 2013). Conclusion Despite the fact that most of the services and products offered by the UK banking system being refined, the various banks in the country tend to offer services or products that are similar. The Office of Fair Trading significantly found the banks techniques of executing penalties on credit cards. The British reform of 2014 in the banking industry is quite promises to provide regulatory standards for the operation of the industry. In addition, the size of the banking industry is relatively large and some argue that this size has provided some of the problems in the industry. However, some of the decisions made by key stakeholders concerning strategy, innovation, and other relevant aspect have shaped the nature of the banking industry in UK. Some of the stakeholders in the banking industry in the UK are the investors, shareholders, consumers, government, bank regulators, depositors, politicians, taxpayers, and the bank staffs. One of the regulatory bodies in the banking system is the Financial Conduct Authority which is responsible for the protect the consumers, promoting integrity in the market for financial institutions, and promoting competition in the banking business arena References: Batty, J & Ricketts (2014). Promoting Competition in the UK banking Industry. Retrieved on 13th May 2015 from: https://www.bba.org.uk/wp-content/uploads/2014/06/BBA_Competition_Report_23.06_WEB_2.0.pdf Greenham, T (2013). Why the UK could Benefit from the Stakeholders Banks. Retrieved on 13th May 2015 from: http://www.neweconomics.org/blog/entry/why-the-uk-could-benefit-from-stakeholder-banks Kern, A (2012).UK Corporate Governance and Banking Regulation: the Regulator’s role as Stakeholder. Retrieved on 13th Mat 2015 from: http://www.stetson.edu/law/lawreview/media/uk-corporate-governance-and-banking-regulation-the-regulators-role-as-stakeholder.pdf Quarterly Bulletin (2014). Why is the UK Banking System so Big and is that a Problem? Retrieved on 13th May 2015 from: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q402.pdf FCA (2013). The FCAs Approach to Advancing its Objectives. Retrieved on 13 May 2015 from: http://www.fca.org.uk/static/documents/fca-approach-advancing-objectives.pdf Read More