Financial Crisis and UK Banking Reform

Financial Crisis and UK Banking Reform



Financial Crisis and UK Banking Reform

Introduction

Without doubt, the UK has been badly hit by the global financial crisis. There was a massive outcome of the worldwide financial crisis on the United Kingdom's financial and Banking sector. There have been instances of large government bailouts including the nationalization of Northern Rock and the takeover of HBOS by Lloyds TSB as a rescue measure. The banking sector in the UK, comprising corporate, personal, and retail banking services, is spread throughout the country. The government has introduced a new policy framework for banking markets in the UK, which includes increasing transparency in banking supervision, delivering effective competition scrutiny, and eliminating regulatory distortions. A new banking act came into force in early 2009 to avoid financial distortions in the economy.

Before the credit crunch, the British economy was enjoying robust growth on the back of solid fundamentals. As is the case with most developed economies, the service sector has an increasingly important role to play. The UK registered fluctuating GDP growth during 2004-10, with the highest growth rate of 3.1% recorded in 2004. The global financial crisis impacted the country in 2008, when GDP growth went down to 2.7%. In the last quarter of 2008, the economy entered recession, which intensified in 2009 as the economy contracted by 4.9%. During this time, the state stepped in to nationalize ailing banks, indicating a shift in policy direction. Moreover, a rise in government borrowing has increased its debt, which is one of the highest among the EU nations. Lower levels of industrial output have also led to massive job losses and the country has its worst unemployment rate in 12 years.

The Governor of the Bank of England, Sir Mervyn King, stated in a speech that the United Kingdom faced two fundamental long-run challenges. First, to rebalance the economy and Second, both the structure and regulation of banking in the UK need reform. With the widespread recognition that the regulation of banking required reform following the financial crisis, this paper discusses that to what degree the coalition government's proposals for reform represent a panacea for the problems of the banking sector which the financial crisis highlighted.

Discussion

In the first three months of 2012, the UK's economy contracted and second quarter growth was in danger due to increasing worries about the euro's survival. By June 2012, ratings agency Egan-Jones had cut the credit rating for the United Kingdom to AA-minus with a negative outlook from AA.

The UK is the second largest economy in the EU and is one of the strongest in terms of social welfare, standards of living, unemployment, interest rates, inflation, and inward and outward foreign investment. The UK has the seventh highest level of GDP per capita in the EU in terms of purchasing power parity (PPP), after Luxembourg, Ireland, the Netherlands, Denmark, Austria, and Finland, and it has the third highest level in the G8, after the US and ...