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The UK Banking System - Essay Example

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The UK banking sector is the third largest in the world after the US and Japan. In addition to having one of the largest commercial banking industries, the UK is also a major international centre for investment and private banking. The UK banking sector's strong international orientation is reflected in the substantial foreign presence and sizeable assets of foreign banks in London.
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The UK Banking System
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The UK Banking System

Download file to see previous pages... Many of these do not have a physical presence in the UK but can accept deposits on a cross-border basis. Assets and liabilities of the UK banking sector reached 4,165bn at the end of 2003, nearly three times the 1993 total. Although their share decreased somewhat during the past decade, foreign banks still held over half of UK banking sector assets in 2003. European banks accounted for nearly a half of this, followed by US and Japanese banks (Delta Quest Network, 2005).
Bank of England is responsible for maintaining overall stability of the financial system as a whole. Since its responsibilities for supervising individual banks were transferred to the FSA, the financial stability role of the Bank has been to focus on identifying and limiting systemic financial risk. This involves close monitoring of the financial system infrastructure, particularly payments systems. The Bank also monitors economic and financial market developments, as part of an overview of the system as a whole.
Now-a-days, the main focus of most of the banks is on risk management primarily on reputational, regulatory, operational and strategic risk, as well as the more traditional credit and market dimensions of risk. There are a number of factors responsible for this increased focus. The major of them are globalization, the relatively favourable economic environment - such that the UK banking sector has made record profits again this year, it remains highly capitalised and asset quality remains strong; the reputational impact that high profile regulatory issues are seen to have had - on both the retail and wholesale side - and the shift in the regulator's focus towards governance and control issues; and the unprecedented volume of regulatory change (Hale, 2004).
Both the UK and world economy are continuously gaining advantage from a sustained period of consistent growth. The banks have benefited from the economic health, producing a strong financial performance over the last few years and in the first half of 2004. They remain well -capitalized and there are no signs of any serious deterioration in asset quality. Yet, the risk of macroeconomic outlook continues to exist.
The move to slightly higher interest rates is the first aspect to be considered. To state the obvious, higher interest rates will increase the cost and reduce the affordability of both the stock of consumer lending and new loans. Although the monetary authorities both in the UK and abroad are managing the turn in the interest rate cycle with great care, regulators are required to acknowledge the risk that the shift to a more moderate rate of growth in consumer borrowing may not be universally smooth (Hale, 2004).
Secondly, the decline in lending margins. A long period of strong personal sector credit quality, coupled with strong competition for lending business, has helped squeeze margins to historically low levels. The effects of this on the bottom line have been disguised by strong volume growth. There are two downside risks for the banking sector in the UK as felt by the FSA. The first is that, the period of strong volume growth may be coming to an end. The second is that a downturn could expose banks as having under- priced risk through the cycle.
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