Effectiveness of the UK banking system


TITLE:Assess the effectiveness of the UK banking system.How can it be improved?

The United Kingdom is one of the most developed countries in financial area.London is the financial center of Great Britain, as well as the primary international financial center of the world. The financial status of London came into being at the time when pound was regarded as the main international reserve currency.(Kosmidou Tanna and Pasiouras 2006) Nevertheless, after the second world war, such status became worse along with the decline of England's financial center status. However, along with the US dollar crisis and the spring up of Euro-money market since 1970s, London's financial center status got a resumption. The dominance of London is that it possesses a relatively steady financial system and political environment, additionally, the control to international banking is relatively permissive. Possessing a large amount of bankers who provided with abundant professional as well as different levels of sundry professionals. What's more, it has eminent infrastructure and communication network, which make it have the superiority in the aspect of language, time zone and geographical position.

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This essay maily discuss the banking system in UK, through the current problems facing financial crisis and give some idea to improve the effectiveness of banking system and organization in the United Kingdom. What can not be ignored is that the banking system in UK also emerges several limitation. This text is focusing on four main aspects:the safety of deposit, control of compensation,venture management, and bonus system. The ministry of finance in the United Kingdom published a rule of law to reply to the issue of financial stability,bank failures and depositor safeguard. In the content of this new rule of law, the small and medium depositors' profits are increasingly protected, improve the regulation to the liqudity of banking, which gives the Bank of England anthority to offer provisional fonds Clandestinely to those banks which facing bankruptcy.

First, as the revolution of financial system issue becomes one of the central subjects under discussion in the Labour Party Great Britain Annual Conference , what should be focused on is how to ensure the security of the depositors' deposit (http://news.bbc.co.uk/ Accessed 09/09/2009). The chancellor of the Exchequer said that British banks should increase the insurance cardinal number of common depositors' deposit security to 100 thousand pounds (http://www.ce.cn/ Accessed 09/09/2009). It brings this revolution into effect, small and medium depositors would be protected by this revolution and gain more profits from it. Thus can give small and medium depositors more confidence so that they will get informed that their deposits in banks are safe, in this way the banking account can keep steady,and to keep the financial market balanced, finally to produce a more peaceful environment for country from the financial crisis, to some extent, the government is trying their best to reduce the effects the financial crisis gave to the whole world. Such revolution can be coordinated as encouraging depositors to decentralizate their deposit so that they can be classified into small and medium depositors to enjoy the profits. That is, they will be able to get more safe form of deposit by deviding their deposits into different banks to reduce the risks and get profits from which the issue give to small and medium deposits. In other words, for those large-scaled depositors that occupy the large amount of money deposit in banks, there is empty of safeguard measures for their benefits.

It is considered from Mervyn King, the President of England Bank that the banking system in UK and the scale of some specific banks are excessively huge, thus, we should not allow the combination of retail banking and risk investment banking (http://content.caixun.com/ Accessed 09/09/2009 ).According to Mervyn King's theory, he made an announcement in the speech to bankers at the Mansion House that he was not sure that the Bank of England has had any banking instruments available already to insure the stabilization of the financial system (http://www.hm-treasury.gov.uk/ Accessed 09/09/2009). It can be clearly seen back to the years when we were leading to the financial crisis that there was a trend of purchasing or developing more risky investment banking business by saving banks, which make taxpayers face greater outstanding payable when they get into dilemma. Consequently, combination of the retail banking and investment banking should be limitted and well evaluated therefore the risk of banking business will be able to reduce (http://content.caixun.com/ Accessed 09/09/2009). Otherwise, Davy walker, the senior consultant came out with an independent census declared that British banking business is obliged to carry through revolution concerning compensation as well as corporate governance aspect (http://www.chinaccm.com/ Accessed 09/09/2009).

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It is reported that the status quo of banking system in UK should be regulated. Taking the overall situation into consideration, in developed countries, two solutions for bank-run problems have been proposed and adopted. The first is the implementation of a deposit insurance scheme for the deposits of households. In most countries, banks pay premiums to fill a fund, nevertheless in other countries, banks need only to cover sustained losses after a failure. Additionally, consumer protection is another motivation for deposit insurance. The other way to solve the bank-run problem is the role of the central bank, like the Bank of England as the supervisor of the money markets as well as acting the lender of last resort, which may provide funds to illiquid but solvent banks.(Bikker and Bos 2008) Subsequent to the United States, the high compensation and high bonus in financial institutions which get into financial crisis become the hotspot issues in the United Kingdom.

England, being one of the harder-hit areas in the financial crisis, attracting social public opinion on the issue on banking bonus after Obama, the president of America promulgated a compensation restriction regulation to American financial institutions. This was caused by the plan of Royal Bank of Scotland that to extend a number of 1 billion pounds as bonus to 170 thousand personnnel. Which, however, this money was collected by public purse thus it should be used in recovering the bank from financial crisis and keep the banking system steady in order to preserve the national living standard. It could be understand that banks have to use this method—to extend bonus to keep the senior executives stay in their banks. Whereas, the Royal Bank of Scotland is already semi-nationalisation due to capital injection of 20 billion pounds by British government last year. Which, the result is that there is no reason for extending bonus using public purse to perform the ”contractual obligation” (http://news.xinhuanet.com/ Accessed 09/09/2009). Therefore, the high bonus stock have had bad effects on banking organization and is not reasonable. Measures should be taken to regulate the distribution of public purse. Dispense to senior executives is necessary, nevertheless, the amount of fond should be well organized and regulated.

London, the United Kingdom has the most developed financial and banking systems all over the world, it suffered more from the financial crisis. From this crisis there explodes plenty of issues which the government, banking area and bankers should pay attention to. For instance to revolute the compensation system, control the high compensation, regulate the public purse to come up with some more reasonable measures to decrease the bad effects the financial crisis brought. Also, increase the protection of small and medium depositors by way of increase the insurance cardinal number of common depositors' deposit security, to reduce the risky financial instruments and business, encouraging large depositors to devide their deposits into different banks. Problems can be seen when facing seriously financial crisis, and measures should be taken immediately to reduce loss. Nevertheless, losses cannot disappeare and the country have to pay for it, only by taking efficient measures can the banking and financial systems become more effective so that the loss due to financial crisis and daily disfigurement of banking system could be reduced to the minimum. And in this way, the whole financial system will be improved, moving up to a new standard so that it could be more rounded.

To summarize, possessing the highest standard of financial system, the Great Britain have plenty of poiorities on financial issues than other countries. Whereas, England suffered deeply from the global crisis since 2008. From this latest financial crisis there can be seen a significant of limitation and aspects to improve the UK banking system. Further explorarion may focus on virtual bank, online bank ,and financial instruments may get more developed to reduce risks to the minimum extent and make profits to the largest extent.


[1]http://content.caixun.com/NE/01/ds/NE01ds3b.shtm Accessed 09/09/2009

[2]http://www.chinaccm.com/60/6007/600706/news/20090717/082036.asp Accessed 09/09/2009

[3]http://news.bbc.co.uk/1/hi/business/7950355.stm Accessed 09/09/2009

[4]http://climate-l.org/2008/07/25/world-bank%E2%80%99s-effectiveness-in-the-environment-evaluated/ Accessed 09/09/2009

[5]http://www.ce.cn/xwzx/gjss/gdxw/200709/26/t20070926_13047437.shtml Accessed 09/09/2009

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[6]Altunbas, A. Gambacorta,L. and Marqueslbanez,D (2009).Bank risk and monetary policy. Working Paper Series, no.1075, pp. 6-9.

[7]Bikker J.A. and Bos J.W.B. (2008). Bank Performance. Oxon: Routledge.

[8]Carbo, S. and Rodriguez, F. (2007). E. Vallelado and P. Molyneux (Eds.) Size and dfficiency in the european banking industry, Chap. 1.Granada: Poligono Juncaril.

[9] Kosmidou, K. Tanna, S. and Pasiouras, F. (2006). Determinants of profitability of domestic UK commercial banks. [Accessed online from University of Birmingham], 09 September 2009.