UK Deposit-Taker Responses to the Financial Crisis: What are the Lessons?

Abstract

While the financial crisis took a large toll on the UK banking industry overall, some institutions were forced to undertake more intensive efforts to deal with the economic downturn and onset of financial difficulties. This study examines whether and how the characteristics of these institutions leading up to and during the crisis differed from those of institutions that dealt with the turmoil using less intensive efforts. I find that, under the regulatory environment existing before the crisis, institutions that ultimately resorted to more intensive efforts (ie debt-equity swaps, mergers with/acquisitions by stronger competitors and outright closure) to deal with financial difficulties had significantly weaker financial profiles as measured by a set of attributes reflecting capital adequacy, asset quality, management skills, earnings performance and liquidity. This study’s framework is useful for characterising financial vulnerability in a regulatory regime similar to that in place before the crisis and, in that respect, is helpful for highlighting weaknesses of the previous regime and for understanding the recent regulatory emphasis on, among other things, a non risk-based capital requirement.