UK Banks Research Articles

Has Bail-in Increased Market Discipline? An Empirical Investigation of European Banks’ Credit Spreads

Following the banking sector stress events of 2008–09 and 2011–12, a new framework for resolving failing banks has been implemented in the European Union which aims to facilitate authorities imposing losses on private creditors. The new framework implements global standards requiring banks to maintain a minimum quantum of loss-absorbing (or ‘bail-in’) bonds. Using data on the credit spreads on large European banks’ bonds between 2010 and 2019, we provide evidence that the risk sensitivity of banks’ credit spreads has increased since the reforms, and that the level and risk sensitivity of spreads on senior bail-in bonds are higher than those of comparable non-bail-in bonds. These findings support the hypothesis that the reforms have increased investors’ perception of the likelihood that they will be bailed in. These results hold for both UK and euro-area banks, though they are somewhat weaker for periphery European banks. We show that the degree of progress a bank has made in issuing bail-in bonds is positively related to the level and risk sensitivity of such bonds. We show that the higher level and risk sensitivity of spreads on bail-in bonds are largely invariant to whether bail-in bonds are contractually subordinated (ie issued as non-preferred senior) or structurally subordinated (ie issued from the holding company), and the effects are also unaffected by whether or not a bank is classified as a global systemically important bank (G-SIB). Finally, we show that the results are robust to changes in the strategy or risk profile of individual banks, via the inclusion of time-varying bank-specific effects.

Corporate governance indicators as determinants of bank efficiency: the case of the UK listed banks

This paper investigates the impact of a variety of corporate governance mechanisms on the performance of banks listed on the London Stock Exchange (LSE), by utilising data collected for 52 banking institutions for the period 2012 to 2017. Exhaustive results derived from multi-model applications document the superiority of GMM models to examine these relationships. Based on robust empirical findings, we support that increasing board size, especially the number of non-executive directors, and the frequency of board meetings up to a certain point could prove to be beneficial for the listed banks on the LSE. Moreover, our findings imply that simply complying with the Governance Code including independent board members or following the trend of gender diversity without proper evaluation of executives’ skills could damage bank efficiency. Finally, this study fails to discern significant links between the number of foreign directors and CEO-Chairman duality with the performance of UK banks.

Corporate governance indicators as determinants of bank efficiency: the case of the UK listed banks

This paper investigates the impact of a variety of corporate governance mechanisms on the performance of banks listed on the London Stock Exchange (LSE), by utilising data collected for 52 banking institutions for the period 2012 to 2017. Exhaustive results derived from multi-model applications document the superiority of GMM models to examine these relationships. Based on robust empirical findings, we support that increasing board size, especially the number of non-executive directors, and the frequency of board meetings up to a certain point could prove to be beneficial for the listed banks on the LSE. Moreover, our findings imply that simply complying with the governance code including independent board members or following the trend of gender diversity without proper evaluation of executives' skills could damage bank efficiency. Finally, this study fails to discern significant links between the number of foreign directors and CEO-Chairman duality with the performance of the UK banks.

Retaining Worried Depositors: Evidence from Multi-Brand Banks

We study the impact of occasional panic-based (non-fundamental) spikes in public attention towards banks. We show that during the Global Financial Crisis, UK banks facing surges in attention respond by increasing retail deposit rates - only so for instant-withdrawal accounts. Exploiting differences across brands of the same bank, we find that banks respond even when surges are not justified by any underlying fundamental factor. Comparing onshore and offshore deposits by the same brand, we show that the absence of deposit insurance and a larger presence of wholesale depositors magnify the destabilising potential of attention. Our results point to a previously undocumented source of bank fragility.

Optimization of non-monetary reward provisions: Evidence from the UK banking sector

This paper evaluates the current state of monetary and non-monetary rewards systems in place in the UK banking sector in an attempt to identify reasons for the preference of monetary rewards over non-monetary rewards. Data was collected from two banks, LLOYDS TSB and Royal Bank of Scotland. The selection of these two banks emanates from their recent bonus crises and the fact that they are both part nationalised, hence the need for a prudent reward system. Questionnaires were used to obtain data and the Evidence Based Reward Management (EBRM) methodology was used to highlight the effectiveness as well as the challenges being faced by the banks with regard to their current monetary reward provisions. Findings reveal that bank employees generally value monetary rewards more than they value non-monetary rewards. Nonetheless, some non-monetary provisions, which virtually do not cost much money, may form the basis for viable alternative reward provisions for bank employees. These findings can help in formulating a more egalitarian reward system in the banking sector.

Strategic and technology risks: the case of Co-operative Bank

Growth by acquisition strategies is risky, first, because often the acquiring firm is uncertain about exactly what is being acquired, and second, because justifying the costs of acquisition is dependent on how well the firms can be integrated to achieve the necessary savings and/or increased market opportunities. In addition to integrating staff and processes, a key integration that must also take place is that of information technology systems. In knowledge intensive industries, such as banking, successful integration of technology platforms, especially software, hardware and networks, is critical to the long-term success of any acquisition strategy. This paper studies the growth by acquisition strategy embarked upon by a mid-sized UK bank, the Co-operative Bank; this strategy was a disaster, leaving a heretofore successful bank in dire trouble and on the block for buyers at a substantial discount to its original value. The case is an example of a board failing to manage its strategic risks and, in particular, its strategic technology risks. In 2008, the board of the Co-operative Bank, backed by its parent the large and profitable Co-operative Group, took the decision to acquire a larger competitor to increase its market penetration. However, despite being well capitalized, the execution of the strategy was botched, not least as regarded the replacement of the bank’s “core banking systems” to accommodate the larger, merged bank. This paper first provides some background on the bank as it embarked upon its growth strategy, before discussing the topics of strategic risk and strategic technology risks, in particular the risks in so-called core systems replacement programs. The events that caused the Co-operative Bank to fail so disastrously are then described, and finally the lessons that can be drawn are discussed.

Independence in bank governance structure: Empirical evidence of effects on bank risk and performance

We investigate how different governance arrangements affect risk and return in banks. Using a new data set for UK banks over the period 2003–2012, we employ a simultaneous equations framework to control for the reciprocal relationship between risk and return. We show that separation of the roles of CEO and Chairman increases bank risk without causing a concurrent increase in return. We also find that oversight by a Remuneration Committee and Non-Executive Directors (NEDs) lowers the probability of bank failure, indicating that empowering an independent Chairman has different effects from empowering independent NEDs. Overall, our results underline the importance of accounting for the heterogeneity in corporate governance arrangements within banks.

A study on trust restoration efforts in the UK retail banking industry

This paper aims to capture the perception of banking services providers on how to restore their customers' trust in the UK banking industry. Twenty frontline employees (FLEs) who have customer-facing responsibilities are interviewed and a thematic analysis of the interview transcripts is undertaken. Through the emergence of three different major themes and a number of sub-themes, we have presented our findings in the form of a trust restoration model. Interviewees have reported three major themes as an action framework to restore their customers' trust. Firstly, banks are implementing enhanced transparency in their operations, by appropriately disclosing the key features of their lending and other banking activities. Secondly, they are implementing policies and procedures that can help strengthen their relationship banking, such as improving employee and customer engagement activities for supporting small businesses and the community. Thirdly, they are promoting operational efficiency by adequately investing in information technology infrastructure. However, some financial service practices identified by the interviewees, for example, the deliberate sale of financial products that are unsuitable for their customers or too complex to understand, still continues. Ultimately, this ‘sale before service’ tactic is incompatible with the industry claims of compliance with the new financial regulations.

The Language of Rules: Textual Complexity in Banking Reforms

The banking reforms that followed the financial crisis of 2007–08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words, and to concerns about their complexity. We define complexity in terms of the difficulty of processing linguistic units, both in isolation and within a broader context, and use natural language processing and network analysis to calculate complexity measures on a novel dataset that covers the near universe of prudential regulation for banks in the United Kingdom before (2007) and after (2017) the reforms. Linguistic, ie textual and network, complexity in banking regulation is concentrated in a relatively small number of provisions, and the post-crisis reforms have accentuated this feature. In particular, the comprehension of provisions within a tightly connected ‘core’ requires following long chains of cross-references.

Beyond placement, layering and integration – the perception of trade-based money laundering risk in UK financial services

PurposeThe purpose of this study was to investigate the perception of trade-based money laundering in Letters of Credit (“L/C”) transactions among trade finance practitioners in the UK banking sector and to compare it to the perception of the same risk by the Financial Conduct Authority (“FCA”), the regulator of the UK’s banking sector.Design/methodologyA survey was used to carry out research among financial services professionals engaged in trade finance in the UK.FindingsThis paper contributes to the existing literature in a number of ways. First, it investigates the perception of trade-based money laundering risk from the perspective of financial services professionals, which has not previously been done. Second, it argues that the perception of trade-based money laundering in financial services is overly focussed on placement, layering and integration, and that the full extent of the offence under the Proceeds of Crime Act 2002 is less well known. It further found that financial services firms need to improve their understanding of the nature of trade-based money laundering under UK law.Practical implicationsThis study argues that the financial services sector’s perception of trade-based money laundering risk in trade finance is underdeveloped and makes suggestions on how to improve it.Originality/valueIt provided unique insight into the perception of trade-based money laundering risk among financial services professionals.

Forward-looking solvency contagion

Solvency contagion risk is a key channel through which systemic risk can come about. We introduce a model that accounts not only for losses transmitted after banks default, but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change. We apply the model to run a series of simplified stress tests of the UK banking system from 2008 to 2016, based on two datasets of real interbank exposures between the seven major UK banks. We show that risks due to solvency contagion decrease markedly from the peak of the crisis, to the point of becoming negligible. We also characterise the distributions of both vulnerabilities and systemic importances of individual banks, thereby tracking the evolution of risk concentration.

‘Customers were not objects to suck blood from’: Social relations in UK retail banks under changing performance management systems

AbstractUtilising an analytical framework informed by a moral economy approach, this article examines the social relationships between bank workers and customers in the context of changing performance management. Informed by 46 in‐depth interviews with branch workers and branch managers from UK banks, this article focusses on the interplay of the pressures arising from an intensified and all‐encompassing performance management system and bank workers lay morality. The article seeks to analyse why one group of bank workers engages with customers in a primarily instrumental manner, while another group tends to mediate and engage in oppositional practices which aim to avoid such an instrumentalisation. The article argues that moral economy gives voice to the agency of workers and the critical concerns of the social, economic and moral consequences of market‐driven and purely profit‐oriented workplace regimes.

Fit perceptions, work engagement, satisfaction and commitment

PurposeThe purpose of this paper is to explore the relationship between fit (organization and job) perceptions and work engagement (WE).Design/methodology/approachThe authors deployed a two-wave survey among 377 clerical employees of the specialist lending division of a large UK bank, with the waves separated by 12 months.FindingsThe results show a positive relationship between person organization (PO) and person job (PJ) fit perceptions (at Time 1) and WE (at Time 2). Job satisfaction (JS) and affective commitment (AC) dual-mediate these relationships. The effect of PO fit on WE manifests primarily via AC, while the effect of PJ fit manifests primarily via JS.Practical implicationsThe study indicates that organizations should consider the fit of employees to their jobs and the organization when designing interventions intended to increase WE. Also, potential synergies exist between organizational interventions designed to influence employee attitudes focused on similar units of analysis: e.g., PJ fit with JS or PO fit with AC.Originality/valueThis study provides the first investigation of the dual-mediation, via JS and AC, of the effects of both PJ and PO fit on WE. Furthermore, the use of a time-lagged design strengthens the evidence for the novel hypotheses of this study and enables verification of findings in the extant literature.

“Platformification” of Banking: Strategy and challenges of challenger versus incumbent banks in UK

This paper explores what advantages and challenges new players versus incumbents face in creating / transitioning to a platform business model in a regulated, data sensitive industry, in the context of UK retail banking. Through semi-structured interviews and observations during the 16 months before and 12 months after the introduction of open banking regulation, which triggered new entry by digital banks into the industry, we observed the platform formation attempts and challenges of established and new players in the industry. Our findings highlight the limitations of platform strategies and dynamics in highly-regulated, data sensitive industries and provide a nuanced view of platform emergence and industry transformation with attention to organizational context, interorganizational conflicts, and the regulatory environment.

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.

Internet search volumes of UK banks during the crisis: The role of banking structure and business model

This paper investigates the sensitivity of Google search volumes to the global financial crisis, using a large sample of UK banks. We find that abnormal volumes of searches on bank names are a timely indicator of credit risk, as measured by credit default swap rates, and are strongly related to crisis indicators. Search volumes for retail, private, and universal banks react more strongly than search volumes for other banks, suggesting that depositor concerns drive search volumes. Search volumes for internet banks and for European banks operating in the UK through branches are especially sensitive to crises.

Taking Regulation Seriously: Fire Sales Under Solvency and Liquidity Constraints

We build a framework for modelling fire sales where banks face both liquidity and solvency constraints and choose which assets to sell in order to minimise liquidation losses. Banks constrained by the leverage ratio prefer to first sell assets that are liquid and held in small amounts, while banks constrained by the risk-weighted capital ratio and the liquidity coverage ratio need to trade off assets’ liquidity with their regulatory weights. We calibrate the model to the UK banking system, and find that banks’ optimal liquidation strategies translate into moderate fire-sale losses even for extremely large solvency shocks. By contrast, severe funding shocks can generate significant losses. Thus models focusing exclusively on solvency risk may significantly underestimate the extent of contagion via fire sales. Moreover, when studying combined funding and solvency shocks, we find complementarities between the two shocks’ effects that cannot be reproduced by focusing on either shock in isolation.

Sticks or Carrots? How to Make British Banks More Socially Responsible

SUMMARY The relationship between banks and society in theUKremains fragile more than ten years after the financial crisis. The level of public mistrust, though lower than in the aftermath of the crisis, still remains largely negative for banks, especially as scandals continue to plague the sector. This raises the question of the effectiveness of reforms adopted in the UK since 2008 to improve the public oversight of banks and change their culture. The reforms resulted in a significant expansion of financial regulation through the adoption of large numbers of new rules with binding effects on banks. New supervisory bodies were created to implement the new rules and to monitor closely the bank activities. This article reviews the effects of the reforms on bank culture and concludes that expanded regulation and compulsory norms brought about mixed results on addressing the cultural problems facing UK banks and on repairing the relationship between these banks and UK society. The article argues that more significant cultural change could come only from the banks themselves acting voluntarily and therefore, going forward, a new balance between compulsory rules and voluntary schemes should be established. The article contributes to the ongoing dialogue between industry experts, policy makers and lawyers about the optimum levels of financial regulation, especially in light of recent calls for rolling back parts of public interventions in the financial sector. The article also contributes to the debate about ways to improve the public image of UK banks.

The impact of quantitative easing on UK bank lending: Why banks do not lend to businesses?

Abstract The growing proportion of UK bank lending to the financial sector reached a peak in 2007 just before the onset of the Global Financial Crisis (GFC). This marks a trend in the dwindling amount of bank lending to private sector non-financial corporations (PNFCs), which was exacerbated with the Great Recession. Many central banks aimed to revive bank lending with quantitative easing (QE) and unconventional monetary policy. We propose an agent based computational economics (ACE) model which combines the main factors in the economic environment of QE and Basel regulatory framework to analyse why UK banks do not prioritize lending to non-financial businesses. The lower bond yields caused by QE encourage big firms to substitute away from bank borrowing to bond issuance. In addition, the risk weight regime of Basel II/III on capital induces banks to favour mortgages over business loans to small and medium enterprises (SMEs). The combination of lower bond yields and Basel II/III capital requirements on banks, which, respectively, impact demand and supply of credit in the UK, plays a role in the drop of bank loans to businesses. The ACE model aims to reinstate policy regimes that form constraints and incentives for the behaviour of market participants to provide the causal factors in observed macro-economic phenomena.

Financial Performance of Islamic Banks in Turkey and the United Kingdom: A Comparative Study

Islamic banks are financial institutions just like conventional banks. However, Islamic banks do not deal with interest and are based on participation. These institutions raise funds and employ them within the scope of Islamic (Shariah) principles where the bank and the depositor share the business, thus sharing the profits and losses. This paper focuses on making a comparative between three Islamic banks in Turkey and five Islamic banks in the United Kingdom in terms of financial performance. More so, it aims to investigate whether or not Islamic banks in Turkey are more profitable, less risky, liquid, operationally efficient, and have a good management quality compared to the Islamic banks in UK. The time span used in this study is one period. The period is four years from 2013 until 2016. Our study used time series data (pooled Least Squares) (PLS) as panel regression on nine financial ratios (CAMEL) to examine the financial performance of these banks according to their profitability, Capital adequacy, Asset quality (riskiness and solvency), Management quality, Earning diversification (operationally efficient), and Liquidity. However, our results are insignificant for UK and significant in Turkey in terms of asset quality and management quality.