The United Kingdom Banking Sector - Research Proposal Example

1. Introduction UK’s economy was clearly in deep recession as the industrial output declined. The fall in the industrial production was three timesof what had been predicted by the economists (Kollewe, 2008). Borrowing rates had to be cut the banks to keep the economy afloat. The pound fell against the euro and the dollar. The GDP had been contracting through out 2008 and the Bank of England had to dramatically relax the monetary policy. The failure of the UK banking system was triggered by the subprime mortgage crisis in the US as most banks had invested huge amounts of money in the US mortgage market. The sudden collapse of the Lehman Brothers also led to the situation that banks around the world had to be bailed out and the UK banks were no exception. In 2008, the British government was forced to play a major role in the British banking system to save the economy. All the banks had collected toxic debts and needed cash for survival. However, their scope and potential to raise cash grew weaker by the day just as the need for cash grew stronger (Clark, 2009). 2. Rational for research The UK economy did not grow at all in the second quarter of 2008. In a bid to partially nationalize the banks, the UK government had to use up £500bn of tax payers’ money (Guardian, 2008). This became necessary to restore confidence in the sector and to provide the needed fresh capital. The government wanted to reassure the market that banks such as the Royal Bank of Scotland would survive the ongoing financial crisis. Funds were made available through the Special Liquidity Scheme announced by the government as banks were not keen to lend to each other. The government had also to underwrite lending between banks. Under the grim circumstances, while RBS had to take the government support and issue Preference Shares to the government, HSBC could keep itself from taking funds from the government. While both the banks faced heavy debts, HSBC could survive the financial crisis without financial funding support from the UK government. HSBC had some inner strength that could help it sustain itself. To understand the core strategy and the inner strengths of HSBC, the objective of the study is: 1. To review the available literature on the financial crisis in the UK banking system triggered by the US subprime crisis. 2. To study the UK banks operations during the recession. 3. To focus on the core strategy of HSBC and its operations. 4. To compare the strategies of HSBC and RBS and to determine how HSBC could sustain the crisis without government funding. 3. Literature review Consumers globally, and especially in the developed nations had started living beyond their means (Karsbol, 2007). Savings has dwindled and the central banks were unable to control inflation. The interest rates had been kept artificially low for too long. It was predicted by economists in 2007 that US would be the first country to suffer with the GDP growth turning negative. The housing sector in the UK was predicted to have a downturn and overall trade would weaken. These predictions turned out to be correct as the entire world was gripped by the banking sector crisis. Some other economists had predicted even in 2006 that several factors such as record level of indebtedness, overpriced houses, growing government deficit and the prospects of the slow down of the waters in America could severely impact the UK economy (Telegraph, 2006). The UK banking sector crisis was a chain effect of the crisis that gripped the US economy. With the UK banking crisis mounting, the government decided to take a stake of £50bn in any bank that required support, in the form of preference shares (Guardian, 2008). As this news was broken the shares of most banks fell at the London Stock Exchange as investors became apprehensive. The government’s intention was to avoid a repeat of the collapse of the banking sector in 1930 which ended in the Great Depression. Shares of RBS fell by almost 20 percent as most other banks such as the Lloyds and the HBOS also faced the same situation. RBS was further caught in the uncertainty that surrounded the privatization of the of the Dutch-Belgian financial group Fortis. Fortis became the biggest continental European casualty of the credit crunch (Kollewe, 2009). This was because RBS along with Fortis and Santander had bought the Dutch bank ABN Amro in 2008. RBS had bought the investing banking arm and was in uncertainty over the outcome with the crisis. RBS was one of the three banks that sought government help to fulfill stricter capital requirements that could help the banks to service the credit crisis (Werdigier, 2008). Lloyds TSB and HBOS (that have subsequently merged) had also allowed the government to buy its shares which they could not sell otherwise. The government was also underwriting interbank lending and government support ensured that the bank management would remain in place. High Street banks such as the HSBC and RBS started limiting access to all forms of credit including, mortgages, personal loans and over drafts (Poulter, 2009). Both these banks restricted the new credit cards to their existing customers. It is feared that banks are hoarding cash and refusing to lend which is only delaying the economy recovery. The Bank of England has introduced fresh capital to the extent of £175bn into the financial system through quantitative easing. The strategy to hoard cash and limit credit has not been appreciated by economists as it limits competition and drives up the cost of borrowing. Both HSBC and RBS are trying to rebuild their financial standing and credit is extended only against predetermined parameters of credit scores. All their efforts are to curb defaults against credit cards and loans as the purchasing power of people has reduced due to unemployment. HSBC is still skeptical of another global economic downturn and hence are delaying their expansion plans at the moment as they fear that the current upturn could be short-lived (Fleming, 2009). HSBC has a global reach also a track record of being able to identify economic turning points. As early as 2007, HSBC had warned of the impact of the US subprime crisis. HSBC has always been careful to prevent debts from mounting as they are aware that it is a danger to the economy. Banks such as RBS or Lloyds that are now state-owned have already spurred criticism for running up losses abroad. According to the opposition it is not fair to risk taxpayers’ money on overseas ventures when credit is desperately needed by consumers and business within the country (London Evening Standard, 2009). As banks globally have run into trouble, it is expected that banks that did not take government support or did not need to be bailed out, would benefit from the situation. While all the banks were asked to raise capital, HSBC managed to obtain sizeable capital whereas RBS and Lloyds could not. Thus, while both the banks have become cautions about extending credit to new customers, RBS had to rely on fresh capital support from the government. HSBC could manage to survive through its different strategies perhaps because of its global presence. Base on the literature review here, the research methodology for the study is suggested as below. 4. Research methodology The research strategy has to be based on several factors such as the subject of the research, the research questions, the time at disposal, the budget provided for the research. It also depends upon the researcher and besides each research method has its own advantages and disadvantages. This study would require an in-depth analysis which means a qualitative research strategy would be necessary. This is the inductive method of study and is more suitable for the subject of study. Besides, it is possible to alter the time, the process and the approach as the research evolves (Amaratunga, Baldry, Sarshar & Newton, 2002). The deductive method or the quantitative method would not bring to light the underlying assumptions and explanation of the information that would be collected. This particular study requires an in-depth investigation into how the current situation came into being and how the two banks – HSBC and RBS attempted to save itself during the banking crisis. Since the basic study is to determine the recovery of HSBC amidst the crisis, a case study approach would be adopted. Through the case study approach it is possible to study and understand the process adopted by the subject of the research, in this case the HSBC. The strategy and the reasons for their strategy could be revealed through the diverse and vast amount of literature available online. Review of previous literature helps to synthesize the previous observations and opinions and gain a new perspective. 5. Sources of data As the situation is still volatile in the banking sector, it would not be possible to conduct any interviews or collect any primary data. Much literature is available online and these would have to be analyzed to study the strategies that the two banks have been following. This would ensure independence of the researcher from the subject being observed. This would be a study purely based on secondary data collected from authentic sources. No primary data would be collected as banks would not be willing to answer surveys or allow interviews to be conducted. While figures are available online and information is public knowledge, banks or any other institution at this critical moment would not like to share their core strategies and operations. Literature from government sources would be obtained to ensure validity. While efforts would be made to search for current and relevant data on the subject through academic journals, it is highly unlikely that the information would be up-to-date or match the online sources. Through regular and popular dailies it would be possible to obtain the current happenings in the banking and financial sector in the UK. Blogs too have become a popular and authentic source of information as they give the opinion of the people interested in the subject. In fact, at times, they reveal secrets or valuable information that may not be available through journals of government sources. Hence, blogs would also be considered an important source of information. 6. Data analysis Data analysis starts as data is collected and assimilated. If data from different sources give the same perspective, it can be said to be valid. 7. Time Plan Two weeks – To collect data from different sources. Collection over a period of time would ensure that data at different periods give different perspectives. One week - Data display – all the data collected would be assimilated and attempts would be made to weave the literature together. Discrepancies and contradictions can be identified this way. One week - Data reduction, analysis and conclusion drawing. 8. Ethical concerns The literature that is expected to be reviewed is freely available online. Besides, to procure academic journals library access would be sought. No ethical concerns are raised in this study. In fact, interviews are being avoided to prevent ethical issues because executives might have to be provided incentives to divulge their strategies. 9. Limitations of the study The research questions or the categories listed may be insufficient and may not be comprehensive. They may require sub-categories to gain a deeper insight. It is difficult to predict or presume how much literature would be available through academic journals. However, all attempts would be made to ensure reliability and validity of the literature reviewed. It is presumed that firms or the banks would not be willing to comply with the research and interviews. But at the same time, it is also likely that if interviews were to be conducted, the people that had formulated the strategies that failed may no more be in that position. In this case the perceptions would differ from what was intended of the strategy. As far as literature is concerned, attempts would be made to obtain only from reliable and academic sources or reputed dailies. References Amaratunga, D., Baldry, D., Sarshar, M., & Newton, R. (2002). Quantitative and Qualitative Research in the built environment: application of mixed research approach, Work Study, 15 (1), 17-31 Clark, M. (2009). Institutions shed bank shares as takeover looms. Retrieved online 18 October 2009 from http://www.thisislondon.co.uk/standard-business/article-23623518-institutions-shed-bank-shares-as-takeover-looms.do Fleming, S. 92009). HSBC boss warns of second global economic downturn. Retrieved online 18 October 2009 from http://www.dailymail.co.uk/news/article-1218183/HSBC-boss-Michael-Geoghegan-warns-second-economic-downturn.html Guadian. (2008). Q&A: Partial nationalisation of the UK banking sector. Retrieved online 18 October 2009 from http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.banking4 Karsbol, D. (2007). Financial outlook 2008. Retrieved online 18 October 2009 from http://www.telegraph.co.uk/finance/2954760/FINANCIAL-OUTLOOK-2008.html Kollewe, J. (2009). UK recession could be deeper than feared, official data shows. Retrieved online 18 October 2009 from http://www.guardian.co.uk/business/2008/dec/09/recession-interest-rates London Evening Standard. (2009). Taxpayers could hinder bailout banks foreign plans. Retrieved online 18 October 2009 from http://www.thisislondon.co.uk/standard-business/article-23739920-taxpayers-could-hinder-bailout-banks-foreign-plans.do Poulter, S. (2009). RBS and HSBC become first British banks to ration credit cards to existing customers only. Retrieved online 18 October 2009 from http://www.dailymail.co.uk/news/article-1218269/RBS-HSBC-ration-credit-cards-new-customers-bid-minimise-risk.html Telegraph. (2006). Are you worried that the UK could slump into recession next year? Retrieved online 18 October 2009 from http://www.telegraph.co.uk/news/yourview/1530033/Are-you-worried-that-the-UK-could-slump-into-recession-next-year.html Werdigier. (2008). U.K. Takes Majority Stake in RBS. Retrieved online 18 October 2009 from http://www.nytimes.com/2008/11/29/business/worldbusiness/29rbs.html?_r=1 Read More