UK BANKING INDUSTRY

UK Banking Industry

UK Banking Industry

Introduction

One notable consequence of the recent global financial crisis is the recognition that existing regulation of financial institutions has failed. Self regulation via banking codes failed to prevent the 2008/09 banking crisis, as did national regulation. Current banking regulation in the UK involves three organisations, the Financial Services Authority (FSA) the Bank of England and the Treasury. Until the banking crisis, UK banking regulation could be described as light-touch - in other words, regulators do not engage in aggressive regulation, preferring to intervene only when necessary, and only in limited ways. The main problem for the regulators was that the heavy-touch regulation might force global banks to seek out countries where regulations were less strict. In other words, they would move out of London, leading to huge job losses in the City.

The growth in high risk trading of extremely complex financial products, including derivatives and options, and the increasing securitisation of assets, created what has widely been dubbed a shadow banking system, which increasingly operated outside of normal banking practices. Banking is unlike any other industry; this has been made abundantly clear in the current crisis. Banks have two major privileges that are not enjoyed by normal commercial businesses. The first is the ability to create credit - a fundamental function that underpins the health of the whole economy, and closely connected is the second privilege arising from the implicit and explicit government guarantees of banks solvency. The phrasing of this criterion in the Terms of Reference seems to contain implicit assumptions that the UK sector's international standing equates to domestic competitiveness, and secondly that the international competitiveness of the UK's financial and professional services sectors is synonymous, or at least consistent, with the competitiveness of the wider UK economy.

These assertions would need to be tested in our view, as there are prima facie reasons to suggest that the two objectives of international competitiveness of individual UK financial services firms and the international competitiveness of the UK economy overall might conflict. It is beneficial for an individual UK-based firm to achieve maximum scale and scope to compete internationally, particularly with a profitable domestic market providing bedrock to its international expansion plans. But there is no inherent reason why the positive benefits of overseas earnings from global UK banks will necessarily outweigh the potential raised costs to domestic industry of an oligopolistic banking sector. The Government's own focus on ending over-dependence on financial services implies that such conflicts might exist (Dymski, 2007).

Question 1

Effects on Stakeholders

CSR has become a component of almost every global company, particularly banks, as they tend to enhance their social presence and stature in the present times of financial crises. This presence does not only enhance through various industrial activities but the banks have to be more cautious towards their contributions to the betterment of the society in which they operate. Hence the shareholder theory suggests that shareholders or stakeholders are not the only ones who owe the bank, consideration and ...