Major UK Bank Research Articles

The United Nations Sustainable Development Goal 13 Climate Action and Efforts of UK Banks Toward a Low Carbon Economy?

Banks are increasingly motivated to align their business operations with the United Nations Sustainable Development Goals (SDGs) as this can help them attract investors and build a more loyal customer base in the long run. This paper explores whether major UK banks (HSBC Holdings Plc, Lloyds Banking Group Plc, Barclays Plc, Standard Chartered Plc, and NatWest Group Plc) are increasing their involvement in green banking by transitioning away from fossil fuels. The research gathered expert and policymaker views on decarbonization (reducing carbon footprint) at the Scotland Policy Conference UK in 2022 to support its findings. The results reveal slow progress toward a green banking regime, as the banks continued underwriting fossil fuel IPOs and bond issuances, and funding carbon-intensive industries. Their portfolios primarily consist of fossil fuel projects, with implications for insufficient effort toward meeting UN SDGs related to global climate commitments. The study proposes a policy recommendation: governments should introduce regulations requiring banks to develop a minimum percentage of financial products and services designed to support SDG-related activities, fostering a low-carbon economy.

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.

Exploring the effects of the ‘bonus cap’ rule: the impact of remuneration structure on risk-taking by bank managers

ABSTRACTThis article explores the effects of the bonus cap rule on UK banks to assess its impact on incentives faced by senior managers to make risky decisions. It is demonstrated that the ratio of variable to fixed remuneration is only one of the factors that determine the intensity of financial incentives to make risky decisions. More crucially, the steps taken by major UK banks to evade the effects of the cap by introducing fixed pay allowances, which are paid in shares but are legally structured as fixed remuneration, have created additional risk-taking incentives. Indeed, it is shown that paying part of executive remuneration in shares as such, is a significant driver of risk-taking. It follows that there is no reason to believe that the bonus cap has achieved any improvement in incentives and, therefore, that EU law’s emphasis on the ratio of variable to fixed remuneration is misplaced.

Sending Out an SMS: The Impact of Automatically Enrolling Consumers Into Overdraft Alerts

Incidental charges incurred by UK consumers on their Personal Current Account (PCA) are steep, especially for small amounts of unplanned borrowing and unpaid items. A recent policy mandates major UK banks to send consumers a text message alert of impending charges, allowing them to act before they incur a charge. Using a unique, large and detailed dataset covering the transactions of 1.5 million consumers across 6 banks, and by looking at large-scale automatic enrolment exercises carried out by two major banks, we estimate the effect of automatically enrolling consumers into these alerts. We find that automatic enrolment into alerts has large effects on charges: (i) automatic enrolment into unpaid item alerts (that inform customers of retry periods) reduces charges by 21-24% and (ii) automatic enrolment into unarranged overdraft alerts reduces charges by 25%. We also estimate average treatment effects for different types of consumers, grouped by their pre-alerts level of incidental charges (rare, occasional or heavy), and find that the benefits of automatic enrolment differ markedly between types of consumers. Those who rarely incur charges can avoid as much as half of charges thanks to alerts, whereas heavy users still incur substantial charges after automatic enrolment. We find strikingly similar patterns across the two banks, for both unpaid item and unarranged overdraft charges, providing reassurance that these findings are not specific to a particular customer base or firm implementation.

Too Fast to Live? Effects of Growth on Survival Across the Growth Distribution

Several theories suggest that excessive fast growth may lead to failure. We explore survival across the growth rate distribution for a cohort of 6579 new ventures, tracked over their first 10 years, using customer records data from a major UK bank. We measure failure though termination of the business account (as opposed to either continuation or switching the account to a rival bank), or through entry into financial default. Unconditional bar charts show that it is the 7th or 8th decile of the growth distribution that has the highest survival chances. Although growth enhances survival on average, the highest decile of the growth distribution never has the highest survival, and there are significant non-linearities beyond the quadratic case (specification tests prefer higher-order polynomials). Our findings have implications for the current policy interest in high-growth firms.

The illusion of transparency: the geography of mortgage lending in Great Britain

Purpose– The purpose of this paper is to provide a comprehensive overview of the geography of mortgage lending in Great Britain. It uses a new mortgage dataset as a way to shed light on the spatial distribution of mortgage finance and to highlight the different lending patterns of seven major UK banks. It also examines the relationship between the distribution of mortgage finance and socio-economic status at the local level.Design/methodology/approach– The methodology is based on simple quantitative techniques, including spatial analysis, location quotient analysis and socio-economic classification. Lending data for Great Britain’s 10,000 postcode sectors are the basis for analysis here.Findings– The results suggest that some banks lend significantly less than others in poorer areas, but, owing to a lack of data, it is not possible to say why. It is possible to identify banks that appear to change their lending patterns in areas with different socio-economic characteristics. The paper concludes by reflecting on key messages and by making a small number of recommendations to improve transparency in the sector.Research limitations/implications– In the absence of demand-side metrics, it is not possible to determine which banks lend disproportionately high or low amounts in poorer areas.Practical implications– This paper has implications in relation to increasing financial transparency in the residential mortgage sector. The most important implication would be to highlight the fact that this new data – whilst a welcome development – is a long way from providing proper transparency in the mortgage lending sector.Originality/value– This paper fills a gap in the international literature in relation to our understanding of the geography of mortgage lending in a major world economy. It also highlights important differential lending patterns in relation to socio-economic status at the sub-national level.

Understanding the Fair Value of Bankss Loans

Loans are typically the largest asset class on banks’ balance sheets. So understanding the value of loans is vital to any assessment of the resilience of the banking system. This is not straightforward. The market value of loans is seldom observable. And the nature and diversity of banks’ loans has changed markedly over time: the maturity of loans has increased, on average; banks’ mortgage lending has ballooned; and banks use more hard information in their lending decisions. So it is unlikely that any one valuation technique will capture all relevant aspects of valuation across all types of loans. Recognising this, banks are required by accounting standards to disclose the fair value of their loans in the notes to their accounts. At the end of 2013, the fair value of the major UK banks’ loans was £55 billion less than the amortised cost value.This paper explains loan fair value techniques and compares these to other valuation approaches. Fair value approaches include elements of valuation that are not captured by amortised cost approaches, such as lifetime expected credit losses and embedded interest rate gains and losses. As such, fair value disclosures might provide additional insight into the value of some assets, such as longer-term, fixed-rate loans, like mortgages. But loan fair values, like all loan valuation approaches, come with a number of health warnings. For example, they may capture factors that do not necessarily have a bearing on banks’ resilience. As a result, a loan fair value number on its own is often insufficient, which suggests that there may be benefits to improved supplementary disclosures about the drivers of the fair value of banks’ loans to complement balance sheet values.

The stability of survivalmodelparameterestimates for predicting the probability of default: Empirical evidence over the creditcrisis

Using a large portfolio of credit card loans observed between 2002 and 2011 provided by a major UK bank, we investigate the stability of the parameter estimates of discrete survival models, especially since the start of the credit crisis of 2008. Two survival models are developed for accounts that were accepted before and since the crisis. We find that the two sets of parameter estimates are statistically different from each other. By applying the estimated parameters onto a common test set, we also show that they give different predictions of probabilities of default. The changes in the predicted probability distributions are then investigated. We theorise them to be due to the quality of the cohort accepted under different economic conditions, or due to the drastically different economic conditions that was seen in the UK economy, or a combination of both. We test for each effect.

Whistleblowing, Governance and Regulation Before the Financial Crisis: The Case of HBOS

Following the financial crisis of 2008, the Treasury Committee of the UK House of Commons undertook an inquiry into the lessons that might be learned from the banking crisis. Paul Moore, head of group regulatory risk at Halifax Bank of Scotland (HBOS) during 2002–2005, provided evidence of his experience of questioning HBOS policies which resulted in his dismissal from HBOS. The problems that surfaced at HBOS during the financial crisis were so serious that it was forced to merge with Lloyds TSB, another UK bank, to form the Lloyds Banking Group in which the government took a significant stake. Moore’s evidence to the Treasury Committee revealed that long before the financial crisis, he had raised major concerns with the management of HBOS and with the Financial Services Authority (FSA), the UK financial services regulator. Moore’s evidence led to the submission of further disclosures, replies and rejoinders as evidence to the Treasury Committee. Moore’s case is therefore of considerable interest to researchers of whistleblowing because it is a rare instance of high-level whistleblowing, the details of which subsequently entered the public domain. The information revealed in evidence to the Treasury Committee sheds light on the process of whistleblowing in the context of the governance and regulation of a major UK bank that subsequently had to be rescued by government intervention during the financial crisis. The paper makes a contribution to the wider literature on whistleblowing, and to a greater understanding of aspects of the financial crisis.

Navigating the ethical maze through design action research

Purpose– The purpose of this study is to identify how ethical stances can be used to develop a frame set in the design of a web-based decision support system (DSS) for ethical decision-making and to test both the efficacy of these frames and the potential of such a tool for individuals and groups in both leadership development situations and organisational practice. Unethical behaviour by executives is a frequently cited reason for erosion of trust with other stakeholders.Design/methodology/approach– Utilising action research, by choosing ethics frames such as heuristics, a web-based ethics DSS designed to enable users to explore ethical issues from multiple perspectives was constructed and this was beta-tested with a major UK bank and a global oil company.Findings– In orchestrating constant revisions of the ethics frames in the tool, learning from each research cycle was identified, a new form of action research, a design action research, which emphasises the importance of collaboration in the design of such decision-making tools, was offered and the tool for management development and other applications was successfully beta-tested.Originality/value– It was demonstrated to management developers how web-based systems might be designed by non-information technology professionals; the framing literature was added by demonstrating the value of engaging in dialogue about ethical issues of concern to managers and their organisations and thus improving decision-making; and additions were made to the literature on ethics and Information systems (IS) and contribution toward action research in the fields of IS and ethics was done.

Making out and making do: how employees resist and make organisational change work through consent in a UK bank

This article draws on fieldwork conducted in the back‐office of a major retail UK bank and explores how, when introducing change, management drew on contradictory normative and rational discourses. Its primary concern is to explore how, in this context, employees engaged in contradictory acts that combined elements of both resistance (‘making out’) and consent (‘making do’) that are difficult to disentangle. It is argued that although both are moves within the game, they can be distinguished from each other because the former works against the grain of corporate intentions, whereas the latter works with them.

Is Entrepreneurship a Route Out of Deprivation?

Frankish J. S., Roberts R. G., Coad A. and Storey D. J. Is entrepreneurship a route out of deprivation?, Regional Studies. This paper investigates whether entrepreneurship constitutes a route out of deprivation for those living in deprived areas. The measure of income/wealth used is based on an analysis of improvements in an individual's residential address. The data consist of information on over 800 000 individuals, and come from the customer records of a major UK bank. Comparing business owners with non-owners, the results suggest that the benefits of business ownership are found across the wealth distribution. Hence, entrepreneurship can be a route out of deprivation.

The effect of corporate board characteristics on loan monitoring decisions

Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. A two-way interaction between financial expertise and board independence is also documented. Since likelihood of debt covenant breaches continues to be an important variable in studies of accounting choice and corporate finance the paper provides insights into associated debt contracting costs and their determinants. Apart from extending the academic literature, this study provides additional evidence on the efficacy of good corporate governance in reducing debt contracting costs that should also be of interest to regulators and practitioners

Is Entrepreneurship a Route Out of Deprivation?

This paper investigates whether entrepreneurship constitutes a route out of deprivation for those living in deprived areas. Our measure of income/wealth is based on analysis of improvements in an individual’s residential address. Our data consist of information on over 800,000 individuals, and come from the customer records of a major UK bank. Comparing business owners to non-owners, our results suggest that the benefits of business ownership are found across the wealth distribution. Hence entrepreneurship can be a route out of deprivation.

Protecting whistle-blowers in the UK financial industry

The author aims to investigate the current status of legal protection of whistle-blowers. She will focus on the treatment of the ex-Head of Regulatory Risk at HBOS before the financial crisis of 2007. The author then reviews the whistle-blowing policies and Codes of Conduct of five UK banks and compares them with the policies in the health industry. The article first utilises the black letter law approach to review the current status of legal protection to whistle-blowers. The author then undertakes empirical research into the whistle-blowing policies and Codes of Conduct of five major UK banks. She also adopts a comparative socio-legal analysis, studying the law in both the United States and the United Kingdom. Whistle-blowers play an important role in increasing transparency and informing regulators to stay ahead of malpractice. Legislation alone cannot protect whistle-blowers fully. Corporate governance measures and a tripartite gatekeeping model between the regulator, Chief Risk Officer and auditors are required to give whistle-blowers more protection. This article will have policy implications for practitioners and policymakers on national and international dimensions. Whistle-blowing in the financial industry has been neglected in the major corporate governance and banking regulation reports. The author combines empirical research with her own model of tripartite gatekeeping to protect whistle-blowers in the financial world. This article is thus original and valuable to both academics and practitioners.

Systemic operational risk: the UK payment protection insurance scandal

May 2011 was a very bad month for UK banks. In the previous month, a long running legal case was resolved when the UK High Court ruled against the British Banking Association (BBA) which had petitioned for a judicial review of regulatory action concerning mis-selling of Payment Protection Insurance (PPI) products. Following the ruling, the four major UK banks announced provisions totaling over £6 billion to cover restitution to buyers of their PPI products. Some of the banks also decided to exit the PPI business.At first glance, PPI appears to be standard insurance product. For an up-front or monthly premium, an insurer will sell protection to a borrower against being unable to make loan repayments, as a result of, for example, illness or unemployment. Before the market collapsed, the main distributors/arrangers of PPI contracts were the largest UK banks, often using their affiliated insurance subsidiary as the insurer.The underlying problems that generated the so-called PPI Scandal should not have come as a complete surprise to the banks. For several years prior to the ruling, consumer advocacy groups had been complaining loudly about banks selling PPI products to customers who did not fully understand the policies and, in many cases, did not need the protection provided. Yet, having seemingly taken on a life of its own, the practice of selling PPI policies continued and grew rapidly in all major banks. Various official inquiries found that the 'people' involved, from front line bank staff, lending managers to insurers just did not do the full due diligence necessary to check the suitability of PPI for many customers. Prudence seems to have been diluted/abandoned in a chase for increased product volume across the whole UK retail-banking sector. This paper argues that the losses incurred as a result of the PPI scandal were, in most part, precipitated by Systemic Operational Risk, in particular, People-related Risks. Using examples from official inquiries, the paper identifies some of the People Risks that went unmanaged in this part of the UK Retail banking sector system, until the PPI market seized up in 2011. The paper then suggests proactive approaches to People Risk Management that should help detect and minimize the impact of similar scandals in future. This topic is important as the demographic shift towards longer periods of retirement and the prevalence of the 'universal banking model', means that non-traditional banking products such insurance, pensions and investments, will be increasingly sold through banks, raising the specter of further mis-selling scandals in future.

Predicting loss given default (LGD) for residential mortgage loans: A two-stage model and empirical evidence for UK bank data

With the implementation of the Basel II regulatory framework, it became increasingly important for financial institutions to develop accurate loss models. This work investigates the loss given default (LGD) of mortgage loans using a large set of recovery data of residential mortgage defaults from a major UK bank. A Probability of Repossession Model and a Haircut Model are developed and then combined to give an expected loss percentage. We find that the Probability of Repossession Model should consist of more than just the commonly used loan-to-value ratio, and that the estimation of LGD benefits from the Haircut Model, which predicts the discount which the sale price of a repossessed property may undergo. This two-stage LGD model is shown to perform better than a single-stage LGD model (which models LGD directly from loan and collateral characteristics), as it achieves a better R2 value and matches the distribution of the observed LGD more accurately.

Does segmentation always improve model performance in credit scoring?

Credit scoring allows for the credit risk assessment of bank customers. A single scoring model (scorecard) can be developed for the entire customer population, e.g. using logistic regression. However, it is often expected that segmentation, i.e. dividing the population into several groups and building separate scorecards for them, will improve the model performance. The most common statistical methods for segmentation are the two-step approaches, where logistic regression follows Classification and Regression Trees (CART) or Chi-squared Automatic Interaction Detection (CHAID) trees etc. In this research, the two-step approaches are applied as well as a new, simultaneous method, in which both segmentation and scorecards are optimised at the same time: Logistic Trees with Unbiased Selection (LOTUS). For reference purposes, a single-scorecard model is used. The above-mentioned methods are applied to the data provided by two of the major UK banks and one of the European credit bureaus. The model performance measures are then compared to examine whether there is improvement due to the segmentation methods used. It is found that segmentation does not always improve model performance in credit scoring: for none of the analysed real-world datasets, the multi-scorecard models perform considerably better than the single-scorecard ones. Moreover, in this application, there is no difference in performance between the two-step and simultaneous approaches.

Service improvement: lessons from the UK financial services sector

Purpose – The purpose of this paper is to investigate service improvement initiatives within a major UK bank, and assess issues which may have contributed to the current financial crisis.Design/methodology/approach – Primary research includes a survey of bank staff and longitudinal on site interviews and observations over a period of five years.Findings – It is found that service improvement initiatives have focused on the use of popular business models, SERVQUAL, balanced scorecard, and European Business Excellence Model (latterly with elements of Lean). Results show that participant perceptions towards these models are generally negative, with a high incidence of failure to achieve expected results and negative organisational consequences. The paper examines the reasons for this and assesses alternative approaches now being piloted.Research limitations/implications – The results are case specific and may therefore not be generalised. The findings however present some rich insights into issues arising in...

The Effect of Corporate Board Characteristics on Loan Monitoring Decisions

Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. The two-way interaction between financial expertise and board independence is also documented. Apart from extending the academic literature, this study provides empirical evidence on the efficacy of good corporate governance in reducing debt contracting costs that should also be of interest to regulators and practitioners.