Berger, Molyneux and Wilson (2010) are of the view that banks provide a full range of financial service like banking, securities, and insurance under a single corporate structure and must be supported by the single capital base, the term “universal bank” has multiple meanings, but commonly it refers to the commercial banking that is making loans and collecting deposits along with investment banking in which there are issuing of underwriting and trading in securities. Ryan-Collins and Goodhart (2012) point out the broader view that universal banks offer a wide range of financial services including commercial banking, investment banking with other activities like insurance, it seems like the multipurpose financial market which provided both banking and financial services. Financial Times (2015) terms refers universal banking as financial services of retail, wholesale and investment banking services under one roof. Demirguc-Kunt (2010) refers that universal banking is a combination of large banks operate extensive networks of branches, providing multiple services, holding claims that firms about participation in corporate management of firms. Forsyth and Verdier (2003) are of the view that universal banking began almost in 1930 to 1940 and Europe is the home of Universal Banking, although other countries also adopted it.
Structure of United Kingdom Banking System
Schumpeter (1939) refers the connection between banking and financial system in economic growth and it is most old history of this specified reference of this field. Beck and Rahman (2006) speculate that in the recent economic literature, banking system measures a reasonable ratio and access like banking, loan ratios in gross domestic products, and it is a direction to analyse other financial markets. Banking systems have many other multiple dimensions that bank assets may be kept in one house, the bank required few branches or a large number of branches, but it was very true in the early stages of banking when banks were in their development phase. Heffernan (1996) describes the financial system refers some points very clearly that the system can provide payments, can give support between savers and borrows and play major role in insurance against risk. The British banking industry has many changes from the last 20 years, besides forces which have the power to change the supply and demand functions, change has also been made due to domestic deregulations. Hsbcnet.com (2015) reports that The Bank of England has always shown keen interest in the structure of the financial system because financial stability may have an effect on cost and availability. Many new products emerged over the past 50 years and the United Kingdom banks have full range of financial services and become larger. United Kingdom banking system made a dramatic shift in size from past 40 years and the total assists rise from 100% to 450% of the nominal Gross Domestic Product, banking giants claiming that the UK banking system keeps this pace in future also. Salina and Peltonen (2013) describe that financial stability depends the potential impact size of UK banking, so ultimately there must be some factors behind this huge banking size, description about those factors is important and these are financial hub benefits, comparative advantages and historical factors. Bush, Knott and Peacock (2015) describe the size of the UK banking system as shown in figure 1.1 and figure 1.2 refers below.
Size of GDP of UK Banking System (2013)
Regulatory Challenges of Universal Banking Models
Alworth and Bhattacharaya (1998) are in the view that in the recent decades, the banking sector has undergone due to the forces of globalization and lack of technology, secondly it is also recognized de-regulation is due to that higher degree of freedom to financial institutions as a so it requires strong supervisory authorities. Changes in the nature of banking risks, off-balance sheet business and complexity in the nature of transactions all these need strong internal risk management and strengthening of existing capital requirements in 1980 and early 1990 numbers of bank failures were due to the way banks were regulated. Quinn (2012) is in the view of that change is needed in the banking sector, there is some need to show the market trends of entry and switching are enough for competition where customer focus is on the front line. Different advance economies adopted structural bank regulation measures to face the regulatory challenges and one element is mandatory upon them that separation of commercial banking from certain securities market activities. Treanor (2011) reported in the “Guardian”, that the United Kingdom is going to act upon Vickers Commission suggestions as a major measure the report, in which Sir John Vicker recommends to Britian biggest banks to implement reforms until 2019, this is going to be initiating after the collapse of Lehman Brothers in 2008. Conway (2011) is in the view that Vicker’s recommendation is going through to ring-fencing in the United Kingdom banking sector. The Economist (2012) reveils the report that universal banks merging investment banking complexities with commercial banking services, in one extent it is good offering services to the customer while on the other hand analyst have no second thoughts also, the famous universal banking giant Sandy Weill, the mergers of Citigroup saying that the megabanks should be broken up. Shrivastava, Pandey and Vidyarthi (2007) describe the view that banks facing information imbalance which will cause the lack of public confidence in the banking system, so there is the need to protect it from this high risk taking by banks. Because banks are critical for mobilizing the public savings, its safety and return to savers also, so banks need for their heavy regulation in this sense also. Mostly challenges have faced by bank regulators in the early 80s, due to deregulation of economic system, financial innovation waves and internationalization of financial flows all these challenges arise the potential of doubts about the bank’s risk management procedures. Orbell and Turton (2001) speculate that banks take deposits from public to investing these deposits in risky assets and businesses, ultimately banks are in a position to take risks excessively, secondly market discipline, where these deposited are invested, is a mechanism which curb the incentive in taking excessive risk more costly for banks. So after recent events of severe market and regulatory failure in Europe and United States a point arisen that there should be need for reforms. While on the other hand single regulator model of United Kingdom widely accepted across the globe.
Regulatory Challenges, and British Economy
Kim and McKenzie (2010) argue that financial crises faced globally in 2008 laid many questions for strong measures to prevent any resemblance in future, bankers, regulators, politicians or economists nobody want accept the blames of crises. Particularly in British banking which has a rich history, which spread out on centuries, founding of the Bank of England in 1694. Bank of England has always had a dominant position in the British economy while other banks were underdeveloped. So due to small in size other country banks were inherently fragile, which made to face them financial crises in early nineteenth centuries, one major example is crises of 1825, and then the first time the Bank of England understood the role of lender of last resort. Gregory (1929) quoted ‘The Economist’ that “the limited liability of the wealthy may not be expected to prove as good if not better security than the unlimited liability of the poor”. Mullineus and Murinde (2003) urges that the in 1986, main clearing banks ranked them fully integrated banking, invested more than one billion in the securities business. British banks highly enhanced their standing globally, commercial banking was higher profit gaining business in the United Kingdom and have much concern about the level of competition. Conway (2011) describes that the time of financial crises all had become universal banks, amalgamation of commercial and investment banking activities, on the other hand Barclays, HSBC and Standard Charted faced crises without government support. Treanor (2011) describes that British’s fifth largest mortgage lender Northern Rock, is going to run on, and this disaster situation was not seen in United Kingdom from over 100 years, most dramatic symptom of Northern Rock crises indicated the low grip on financial markets in the United Kingdom. Northern Rock has good use of structured products in funding before to the crises, but still impacted by the turmoil in America’s mortgage market. The bank has a low deposit ration to loan failed to renew its short term financing and was forced to beg to the Bank of England for assistance. As soon as news broke, the customer quickly withdrew their savings, such panic situation which was not experienced in the United Kingdom since 1866. Salina and Peltonen (2013) describe that at the time of crises United Kingdom government need to inject billions into the industry, also the Bank of England funded many banks for keeping them in running and this bail out costs raised real concerns. Some lesson has been learned from Northern Rock incidents that the regulation of banks on liquidity along capital should be centralized, because Northern Rock faced reduction in the liquidity for securities mortgages rather than the inadequacy of capital.
Financial crises and reactions of Regulatory Authorities
The Economist (2012) explained that after 2007 to 2010 financial crises banking and finance market faced severe consequences specially on supervision and regulation aspects, the question was not only to build the public confidence again, which is also a very difficult in its but also the future evolution of the financial industry and banks at larger scale. Regulator and supervisors worked hard after crises and there was a lot of analysis has been conducted towards the causes and their solutions. Some of the measures have been taken by regulatory authorities which describes here one by one (i) Adjusting budgetary problems; failure of banks in many countries faced the common budgetary problems, there are many ways that can affect the real economy and budgets. (ii) Rebuilding the structure of responsibilities; in 1999, the G20 was established and made lots of contributions to shaping up international finance regulation. Biannual meeting was held in the early years, but greater frequency of meeting done in 2009 and 2010 due to the issuance of declarations and progress report. Multinational agency standards have been formalized and Finance Stability Board in 2009 formed with core responsibilities of coordination between national financial authorities and international standard setter. Bank of England (2014) in its news release reveals that The Prudential Regulation Authority (PRA) introduces a new (iii) accountability regime about insurance sector, PRA also consulted same regime for banking sector in July 2014. This regime will also take care and account of the need of new measures which relate to governance of individuals as a part of solvency. (iv) new international standards are coming into being both for regulatory activities for financial firms along with quantitative and qualitative approaches. Besides that there are many agreements done for betterment of the regulatory process, but it has also been clear that individual nations not waited for agreements on international standards to regulate financial sectors. Financial Stability Board, (2010) issue a list of scope and scale of activities about reforms which is a) reforming compensations b) refurbish accounting standards c) strengthening supervisory and regulatory standards d) refining the regulatory perimeters. Brunnermeier et al. (2009) argue that (v) reforms in corporate governance were certainly needed to avoid futuristic failure of financial institutions and this was the main lesson to come out of the crises. (vi) Revision in remuneration structure also required as the mentioned structures of remuneration was very poor in financial institutions. The Financial Stability Board also produced some principles for solid compensation practices. (vii) Reforms in risk management practices also observed, as the failure of risk management systems is the most critical, unfortunately, it is shown in a lot of institutions like international banks specially. Johnson and Kwak (2010) speculate that the (viii) accounting reforms, accounting are a basic component of regulatory regime for example calculation of capital is cor dependent on reported, assessed values, one of the core areas of reforms is required in valuation and provisioning of accounting. One of the other lessons drawn from crises that is regarding (ix) risk identification and mitigation, actually authorities, in some views, are not good to identify or projecting the risk so capabilities to resolve these kind of issues need to be improved and financial policies need to follow proportionate principle. The bank should (x) act like a social contract, in the new regulatory paradigm, it is a major challenge that how bank again focuses on retail business, most banks are in the risk business about the turning liquid to liquid loans, while doing this job banks are badly failing in fulfilling their social contarct part and they need to build it up again. There should be (xi) new business models required as in the phase of crises no business model looked fixer of crises, the diversified banking model required in the scenario and that will help to secure the banking business as well as revenues and customers also. Salina and Peltonen (2013) posit the view that (xii) false sense of security is the core reason of financial disaster, describing further that capital provisions are important but only capital is not only sufficient to address the issue. It was also observed that (xiii) there is a need to redefine systemic risk, in current crises which reflects the unpredictable size of the losses and who will bear that losses. Loss distribution will come as battle in financial crises, bailing out also not a good practice and seems to be taking from one to give others.
Regulatory Framework – Suggestions
Some overhauling required in regulatory framework facing worst financial disaster in Europe and the rest of the world also, reforms are required on regulatory framework internationally in general, and the United Kingdom in particular. Including reinforcing macro-prudential oversight, giving the strength in the overall resilience of banks and shadow banking (or unregulated sectors needs to be in regulation). (i) Optimistic about pricing the assets and risks, much precaution required to observe in risk taking secondly, there is need to be more awareness about regulated and non-regulated structures on information sharing. (ii) Cross border banking resolution required in national and international approaches. (iii) Far-reaching changes required for shaping and functioning of financial institutions with the high pitch of transparency in regard to the financial instruments (iv) In future crises may differ in nature like size, type and its cross border exposure so consolidation and coordination among banks should required on local and international level, one other thing should remain in mind that for the survival, some business models may disappear but some may strengthen their risk management. (v) Measures which could be taken in the middle of crises need to be more supportive rather to hide them, it must be planned whether mega project should remain in the market or there is no need of them, there should be some policies without exacerbating the present crises for the long term view of financial systems. (vi) Financial sector scrutiny perimeter need to be expanded to a wider range of better prevention of banking sector and other financial institution. (vii) Management needs to encourage incentives and discourage regulatory arbitrage. (viii) Need to adopt the concept of systematic risk factoring among funding and effects of leverage. (ix) Buffering between good times and bad time, which can help for liquidity norms of capital provisioning (x) Progress required to tackle the regulation and resolution of cross border institutions for legal hitches. (xi) Flexibility for central banks in providing liquidity, focus also required in the attention on credit and asset booms. Many central banks, especially in emerging markets facing capital outflows so the provision for extra liquidity may more complex regarding foreign exchange reserves and may work fuel to drain for this. (xii) Better crises responses and fiscal support required from national authorities regarding to increase the concern about credit risk and realization of losses there also needs a clear exit policy for withdrawing market or transit to new markets. (xiii) Market discipline must not ineffective for constraining risk taking other than the banking sector. Consolidation rules required more strict specially for entities and risks, particularly with off balance sheet activities.