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Il Sistema Monetario Internazionale

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Il Sistema Monetario Internazionale COMPARING FINANCIAL SYSTEMS Lesson 3 The UK financial system 1 What you will learn in this lesson Overview of banking system in the United Kingdom. The features and changes of banking sysyem. The features and changes of building societies. The banking system in the UK The financial system in the United Kingdom is a typical market-oriented system, in the sense that markets play an important role. However, the UK system is characterized by much less regulation than that in the US. The City of London has traditionally been a major center for international banking and finance. The foreign and domestic sectors of the banking industry are roughly equal in size. This large foreign presence may partly explain the large ratio of banking assets to GDP. Although there was no equivalent to the Glass-Steagall Act, until the late 1990s the domestic sector was divided into commercial banking and investment banking (merchant banking, in UK terminology). Currently, however, most banks in the UK offer very similar services, distinguished only by differing interest rates. The banking system in the UK In the 20th century, with the outbreak of World War I, UK banking flourished and the so-called ‘’Big Five’’ (the five largest UK-based banking groups) commenced a series of takeovers and mergers. These banks (Westminster, National Provincial, Barclays, Lloyds and Midland) were eventually reined in by government control. Between the wars, however, there was a decline to match the general depression of the time. But the banks fought back by taking action to recruit less wealthy customers and by introducing small saving schemes. Only in the 1950s there was a real recovery, with a huge increase in provincial branch offices and the emergence of the high street bank (large retail banks with many branch locations). Relaxation of some controls over mergers and acquisitions led to consolidation in the 1960s. The banking system in the UK The Big Five became the Big Four, along with the takeover of several regional banks (Martins, District Bank, National Bank, Glyn Mills and William Deacons). At the same time the government launched a new banking service, the National Girobank. In 1976 the Banking Act increased the supervisory role of the Bank of England. Introduction of computing, credit cards and many new services continued to drive the expansion of banks and as deregulation was introduced competitiveness increased. Banks improved services, refurbished antiquated premises and brought in further technology such as ATM. The banking system in the UK In 2010, more than 300 banks and building societies are licensed to accept deposits in the United Kingdom. However, the provision of retail banking services is highly concentrated. Of the 16 clearing banks present in 1960, fifteen are now owned by the four big UK banking groups: RBS, Barclays, HSBC and Lloyds Banking Group (LBG) These banks, along with Nationwide and Santander, together account for almost 80% of the stock of UK customer lending and deposits. Collectively, however, the four largest groups account for a smaller share of the market for these services than the banks from which they originated. The banking system in the UK In last years the UK banking has been impacted by major shocks. These include the turmoil of the 2007–8 global financial crises, the 2011 euro sovereign debt crisis, the mis-selling of payment protection insurance (PPI), LIBOR, FX and other rate fixing scandals. As a consequence of these ‘shocks’, the UK banking has suffered big losses, forced significant government intervention and led to major regulatory reform. The scale of government intervention has been unprecedented and has included three main types of intervention: 1. guarantees for bank liabilities; 2. recapitalisations; 3. various asset support measures. The banking system in the UK Total state support to the UK banks between 2008 and 2013 amounted to 19% of the country’s gross domestic product (GDP). Around €191 billion was for guarantees and other liquidity measures and the remainder went to recapitalizations and asset relief (€140 billion). The significant injection of state funds, coupled with subsequent regulatory reforms (including moves to adhere to Basel III capital and liquidity requirements) have aimed to boost banking system soundness, limit excessive risk-taking, and improve banking sector conduct. A new bank resolution regime has also been put in place. The authorities have also been active in promoting new bank entrants, known as “challenger” banks to compete with the Big Four. There has also been ongoing investigation into the competitive nature of the UK banking, most recently highlighted by the findings of the Competition and Markets Authority (CMA) report on retail banking (2016). The banking system in the UK This highlights the authorities desire to increase competition in the system, especially in the light of the high degree of market concentration in certain sectors of the banking business (especially personal and small and medium-size enterprise (SME) areas. It also illustrates concerns over “too-big-to-fail” or “too systemically-important- to-fail” issues that surround the largest banks. In fact, the big four banks all had consolidated assets greater than national GDP. The banking system in the UK UK-based banks This sector has traditionally been dominated by the big four clearing banks: Barclays, HSBC, Lloyds Banking Group, The Royal Bank of Scotland Group. Foreign banks London's role as an international financial center means that the foreign sector is roughly the same size as the domestic sector. With a few exceptions, such as Citibank, foreign banks are not involved with the domestic market. Building societies The primary role of these institutions historically was to provide mortgages. Deregulation allowed them to expand their activities into other banking activities. This has prompted many to change from a mutual form into banks in recent years. Other major financial sectors Pensions funds Public This covers all residents, with a lump sum for everybody. There also exists a component linked to average earnings during working life, but this can be opted out of. However, it has low replacement ratio. Private Largely defined benefit based on final salary. Provisions for total or partial indexation are common (75% of participants). Insurance companies Provided by bank subsidiaries as well as insurance companies. The industry is highly fragmented and lightly regulated. Lloyds exchange is important for domestic and international syndicates. UK-based banking Today the big four clearing banks are essentially universal banks and provide a wide range of banking services to consumers and firms. Some have moved into life insurance, travel services, real estate, and trust management. They also offer underwriting and other services through wholly owned subsidiaries. The regulations on the activities they can undertake are limited. Some restrictions The only restriction with regard to securities activities is that gilt-edged market making must be conducted through a subsidiary (gilt-edged securities are bonds issued by the UK Government). There is not even a restriction requiring firewalls between different parts of the bank. For insurance subsidiaries, they cannot count their investment as part of their capital, but apart from that, insurance activities are unrestricted. Real estate investments are unregulated. Banks can invest in the equity of nonfinancial firms and vice versa. Building societies These financial institutions were originally formed to help people buy homes by supplying mortgages. Therefore, many were mutual organizations. In the past, their activities were fairly closely regulated by the Building Societies Commission. These regulations have gradually been relaxed, and building societies have essentially become competitors to the big four. Many have changed from being mutual organizations to shareholder- owned banks. Banking sector The UK banking sector has traditionally been highly segmented. The Bank of England usually allocates institutions to whom had granted a banking licence to one of seven sections, reflecting their function (‘retail banks’, ‘accepting houses’, ‘discount houses’ and so on). However, what we think of as ‘a bank’ is often just one division (usually the retail division) of a much larger banking group. The group as a whole offers a full range of banking functions and even a variety of financial services, like asset management, which we would not usually think of as part of banking at all. Barclays Group, for example, is a large conglomerate which operates a retail banking division alongside corporate and investment banking and asset management functions. Deposit-taking and lending services by the clearing banks in their 1960 and 2010 forms Banking sector In these circumstances, we can still distinguish between different types of banking function or activity, but we should not think about these activities being the sole activity of a particular firm. There are some investment banks in the UK which specialize only in that activity but most banks are parts of a much larger group which offers everything. The Bank of England publishes the list of banking licence holders in its Annual Abstract of Statistics. In this list, banks are classified by their ‘nationality’ (the location of their headquarters). Liquid reserves Considering liquidity risk, the first thing to notice in the UK banking system is the very small ratio of instantly available ‘liquid reserves’ to the rest of the balance sheet. But this figure does not strictly correspond to ‘reserves’ since the figure for ‘Balances at the Bank of England’ includes ‘cash ratio’ deposits. These are deposits which banks must maintain at the Bank of England, up to 0.15% of their assets, in order to generate income for the Bank. By adding ‘Operational deposits’ to notes and coin to calculate a ‘reserve ratio’ (reserves/deposits), it amounts in average to just 1% of sterling deposits and to about 0.5%, if we include foreign currency deposits (including euro). In the UK this ratio is only a ‘prudential ratio’.
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