UK Banks the UK Economy Was One

UK Banks

The UK economy was one of the major victims of the recent global economic downturn. This is in no small measure to blame on the country's significantly sized banking sector, where giants like HSBC and Barclays were generally assumed to be "too big to fail." Today, after being the subject of both economic and political scrutiny, the very same reasons are being used to claim that these giants are "too big to save." Both concepts have enjoyed significant critical attention since the economic downturn. Although little has been offered by way of a cure for the failures of the current UK banking system, the general consensus appears to be that something needs to change if future economic disaster is to be averted.

According to Preston (2010), there can be little argument about the phrase "too big" when applied to the UK banking giants. When comparing the market share of British banks with those in other developed economies like the Germany and the United States, the author provides solid support for this statement. In the UK, the top six banks control 88% of all deposits, compared to 68% for Germany's top seven and 35% for the United States' top eight. This means that the banking sector controls a major part of the UK economy. Figg (2011) makes an even more staggering point: the collective loans and investments held by the three banks Barclays, HSBC and Royal Bank of Scotland amount to £1.5 trillion, which exceeds the whole of the British economy.

In this light, the concept of "too big to fail" concerns the relative size of banks to the British economy. Should banks fail, this would have major repercussions for both the individual finances of clients and businesses, as well as the collective economy of the country. Hence, when banks are in danger, the government's first priority is to bail them out with government funding in order to maintain the country's economic health.

According to Preston (2010), the historic result of this has been that banks tended to take business risks to generate profits and bonuses, which it would not have done without the certainty of bailout should these risks fail. This tendency has, however, resulted in crisis because of the wholescale failure of the world's economy. The reasons for this was that not only one or two banks were failing; there was also nobody who could bail them out, as entire economies were failing. Hence the birth fo the phrase "too big to save."

The sheer scale of the risks the banks took and the strain of the government to save them from the failure of these risks created a situation where available funding was not sufficient to cover for the size of the banks involved (Figg, 2011). The banks had become too big to save.

Henderson (2011) argues that "too big to fail" is indeed not a valid concept in the economy of the UK, as its opposite (small enough to fail) is simply not practical: A UK bank of any size that fails will have a significant impact on the economy of the country, either in the form of individual and business investments or on a wider scale. The author explains that this is the result of two major factors: the internationalization of banks that makes it impossible to reduce them in size, and the unlikelihood of ceasing government guarantees for deposits or provide last resort lending.

In other words, banks are not only too big to fail, they are also too entrenched in personal and business economies to fail. They hold too much of the economic well-being in the palms of their hands to fail.

According to Preston (2010), the perception that some banks are too big to fail is nonetheless a reality, and a flaw in the system. As mentioned, this encourages bankers to take risks against fiscal probabilities that are simply not yet realities. In other words, loans that have not yet been repaid are used as collateral for risk-taking loans and investments. When defaults then occur on these loans, the banking system fails and, more of than not, these failures lead to the need to be bailed out. Also more often than not, this responsibility is generally carried by the government.

The issues surrounding the size of UK banks and their inability to fail or be saved are therefore far more complex than simply their size or even their specific share of the banking sector. These issues have caused several authors, politicians, and watchdog bodies to search for solutions to the challenges presented by the significant size of the banks in the UK.

In addition to size issues, suggestions have also ranged towards prohibitions and mandates on what bankers should be allowed in terms of risk taking. In other words, many critics suggest that there should be greater regulation of banks by external bodies that can monitor and prohibit any unnecessary risks. In this regard, Figg (2011) argues that a new body of regulation would do little beyond what was accomplished by existing entities like the Basel Accords or indeed any other international agreements whose aim was to regulate banking. While regulations were implemented, there was little to be done against the super-rich who found ways around those regulations. On the strength of this evidence, Figg (2011) mentions that there is little doubt that this would be done again. Regardless of regulation strength or severity, the incentive to risk client money and charge excessive interests and costs to cover those risks remains, regardless of specific regulating body.

Another option, mentioned by Preston (2010), is to separate retail and investment banking. By separating these two sectors, it would be unnecessary to in fact decrease the size of the bank itself, while in fact achieving the benefits that some claim this option to hold. Furthermore, it is also possible that regulation would be easier to implement and oversee than is currently the case. Nevertheless, the question remains whether the incentive to in fact take risks with client money does not remain the same in the investment sector.

A similar, but less cumbersome, option, according to the author could be to create formal walls where a universal bank owns both a retail bank and investment bank, where both function as separate arms of the bank, without any subsidisation between the two. In other words, should the investment bank fail, the retail bank should remain unharmed.

In closing, it is difficult to say which of these options would best serve those whose interest is most affected when large banks fail, which include the public and businesses making use of their services. When banks are bailed out by the government, tax payers are liable for the bill. Hence, it is indeed in the public interest that solutions be searched for, found, and implemented.