UK Banks Research Articles

A review of the influence of corporate governance on the banking crises in the United Kingdom and Germany

PurposeThe purpose of this paper is to provide an overview of corporate governance structures in the UK and Germany addressing the extent to which corporate governance structures may have been a contributory factor to the recent banking crisis. Following a review of shareholder and stakeholder theories of corporate governance and a comparative overview of corporate governance codes in the UK and Germany, the authors aim to provide some country level macroeconomic data and performance related data for a small number of large banks in the UK and Germany.Design/methodology/approachThe paper is structured as follows. It first reviews the existing literature that underpins the stakeholder vs shareholder debate within corporate governance. It then reviews the current codes of conduct and governance structures implemented by UK and German banks. An analysis of the extent to which the banking crises can be attributed to failures in governance is presented and finally some conclusions and recommendations are outlined.FindingsFindings suggest that while corporate governance in banks would appear to have been a significant factor in the recent banking crisis, based on the performance data, it cannot be said that a corporate governance approach based on either shareholder capitalism (UK) or stakeholder capitalism (Germany) is more at fault than the other. However, it is clear that UK and German corporate governance structures were not adequate to prevent the recent banking crisis and only time will tell whether the remedial actions taken have been sufficient. The present findings, in line with those presented in the Walker report in 2009, suggest that the codes of conduct in both countries were not adequate to deal with the complex issues caused by the financial crisis and that changes need to be implemented. The authors fully acknowledge that corporate governance only played a part in the financial crisis and in order to try to stop a repeat of this, the whole regulatory environment in both countries needs to be strengthened.Research limitations/implicationsThe main limitation of the study lies with a lack of complex analysis undertaken to support the findings.Practical implicationsThe findings from the study suggest that, regardless of the type of governance in operation, current corporate governance rules were not adequate and that a new set of rules is needed in both the UK and Germany. The findings also suggest that the stakeholder/shareholder debate may not be as important as previously claimed and that regulators need to find good governance rules, regardless of theoretical underpinnings.Social implicationsGovernments across the world are currently cutting public spending in an extreme fashion and this is, partly, due to the banking crises. Therefore, poor governance in the banking sector is leading to massive social problems in the real world as governments cut services.Originality/valueThe paper is original as it is the first attempt to discuss the corporate governance failing and the banking crises from a shareholder/stakeholder perspective.

Influencing Financial Behavior: From Changing Minds to Changing Contexts

This article reviews interventions that are effective in changing behaviours in ways that enhance financial capability. Traditionally, behavior change has been seen through the lens of “changing minds”: if we can change the way people think—their beliefs, attitudes, and goals—then we can change the way they behave. More recent developments in behavioral theory show that “changing contexts” can have a powerful effect on behavior: we can change behavior by sometimes quite subtle changes to the environment or context within which decisions are made. We focus largely on the influence of context and provide examples from current UK banks that have changed the “choice architecture” of their products.

New roles for auditors and reporting accountants in UK banking supervision under the Banking Act 1987

PurposeThe paper aims to offer an exploration of the Banking Act 1987 which was passed following the failure of Johnson Matthey Bankers (JMB) in 1984. This Act extended the role of auditors in banking supervision by removing traditional confidentiality constraints and created a new role of “reporting accountant”. The paper seeks to examine the origin and development of these new reporting roles. In addition, the paper considers the extent to which the findings of this historical investigation might contribute to current debates on the role of auditors in banking supervision.Design/methodology/approachThe paper draws on official documents, personal accounts of individuals responsible for dealing with the JMB crisis, and semi‐structured interviews conducted with audit partners and banking supervisors who had direct experience of implementing the supervisory reforms instituted under the Banking Act 1987. Power's explanatory schema of controversy, closure and credibility is adopted as a framework for the analysis of documentary sources and interview data.FindingsThe failure of JMB generated sufficient controversy so as to require reform of the system of banking supervision. The paper shows that JMB was a controversy since it disturbed what went before and carried with it sufficient allies for change. To achieve closure of the controversy, agreement by key actors about changes to the nature of the role of auditors was required to ensure legitimacy for the reforms. Backstage work undertaken by the auditing profession and the Bank of England provided the necessary credibility to renormalise practice around the new supervisory arrangements.Originality/valueThe paper develops Power's schema which is then employed to analyse the emergence of the new role of reporting accountant and extended role for auditors in UK banking supervision. The paper provides empirical evidence on the processes of controversy, closure and credibility that help to ensure the legitimacy of accounting and auditing change.

Financial Services – The protection of bank depositors: new developments

In the context of the Financial Services Authority (FSA) review of consumer protection in financial services, the authors focus on the issues involved in the protection of bank depositors in UK banking. Article by Andrew Campbell (Lecturer in law, University of Wales, Aberystwyth) and Peter Cartwright (Lecturer in Law, University of Nottingham). Published in Amicus Curiae - Journal of the Institute of Advanced Legal Studies and its Society for Advanced Legal Studies. The Journal is produced by the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies, University of London.

Shocks to bank capital: evidence from UK banks at home and away

This article assesses how shocks to bank capital may influence a bank's portfolio behaviour using novel evidence from a UK bank panel data set from a period that predates the recent financial crisis. Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank's capital in this (precrisis) sample period were coupled with a loan response that lasted up to 3 years. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to nonresidents to instrument bank capital's impact on UK resident lending. A fall in capital brought about a significant drop in lending in particular, to Private Nonfinancial Corporations (PNFC). In contrast, household lending increased when capital fell, which may indicate that, in this precrisis period, banks substituted into less risky assets when capital was short.

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.

Public attitudes towards the UK banking industry following the global financial crisis

PurposeThe purpose of the paper is to establish the antecedents of changes in public attitudes towards the UK banking industry following the global financial crisis.Design/methodology/approachA questionnaire was administered to 1,066 people querying their attributions of blame for the crisis, attitudes towards the banking industry, levels of anger, knowledge of the crisis, degrees of moralistic trust, political orientations, prior perceptions of the banking industry's reputation, and whether they had personally suffered as a result of events. A structural equation model covering these matters was developed and estimated.FindingsA substantial deterioration in the favourability of public attitudes towards the banking industry seems to have occurred following the crisis. However, certain groups of respondents were much less critical of the industry's role in the crisis than were others.Research limitations/implicationsThe banking industry of just a single country was considered. Participants only commented on their attitudes towards the banking sector and not their actual banking behaviour.Practical implicationsCollectively, the banking industry needs to advertise the fact that failures on the part of public regulators played a critical role in the advent of the crisis. The industry should take joint action to influence the mass media's interpretations of the banking sector's current activities.Originality/valueThis was the first study to explore how members of the public interpret the post‐crisis identity and behaviour of the banking industry as a whole, rather than individual companies within it. The results contribute to knowledge concerning the determinants of attitude change vis‐à‐vis the banking sector and how customers might be segmented in terms of their perceptions.

Do Depositors Benefit from Bank Mergers? An Examination of the UK Deposit Market

This study examines whether depositors benefit from bank mergers Specifically, do horizontal retail bank mergers influence the availability and interest rates of deposit services? This examination is important, as the effect of mergers on customers is a primary merger assessment criterion in the European Union and the United States. The research question is addressed by considering 57 UK banking mergers over the period 1989–2008. It is reported that different deposit services and deposits of different values face statistically insignificant levels of interest-rate change after mergers. The availability of notice deposit services for low and high levels of investment are reduced after mergers and are largely unchanged for other deposit services. It is concluded that UK depositors benefit little from bank mergers, and different types of depositor face differences in the availability of deposit services after mergers.

Association of gammaherpesviruses and bacteria with clinical metritis in a dairy herd

BACTERIAL contamination of the uterus is very common after parturition and is followed by metritis in up to 40 per cent of dairy cows (Borsberry and Dobson 1989, Sheldon and...

Bank profitability determinants under IFRSs

This study examines the effects of implementation of IAS 32, IAS 39 and IFRS 7 on Greek and UK banks’ profitability during the period 2001–2008. The investigation period has been separated into the period before, during and after IFRS implementation. The empirical findings suggest that, throughout the entire period of investigation, Greek banks’ profitability is mostly influenced by capital strength, bank size, bank efficiency, the use of derivatives and operating expenses. The study shows that UK banks’ profitability is generally affected by operating expenses, the use of derivatives and liquidity.

The great British banking experiment: will the restructuring of UK banking show us how to resolve G-SIFIs?

This article discusses the Financial Stability Board (FSB)'s recent “Key Attributes of Effective Resolution Regimes for Financial Institutions” as they would apply to banks, and the extent to which, if implemented, they would make the cross-border resolution of global systemically important financial institutions (G-SIFIs) possible. It also discusses the reforms to the resolvability of UK banks which have been proposed in the Final Report of the UK's Independent Commission on Banking (ICB). It concludes that the FSB's Key Attributes represent a major step forward on the path to resolution of G-SIFIs. However, there remain significant questions about the extent to which they will be rapidly implemented, whether cross-border co-operation and mutual recognition of resolution measures will materialise under crisis conditions, whether the structure of G-SIFIs will be changed to make them resolvable, how concerns about the transmission of contagion through bail-in will be addressed, how resolution will be funded and whether (given the risks of disorderly resolution) national authorities will in practice have the appetite to resolve G-SIFIs rather than bail them out. Given this reality, the ICB's proposals for separation, by subsidiarisation, of UK/EEA retail and other essential activities, and for requiring such activities to be supported by additional primary loss-absorbing capacity that facilitates “bail-in”, make sense, particularly when the vulnerability of the UK economy to its large financial sector is taken into account. While the ICB's proposals will not necessarily to make UK banks safer – in the sense of less likely to need resolution – they should make the resolution of UK/EEA retail and other essential activities substantially simpler and reduce the likelihood of taxpayer support. The UK government is right to reexamine the case for exempting the non-ring-fenced operations of UK banking groups from the additional primary loss-absorbing capacity requirements proposed by the ICB, but dilution of other aspects of the proposals (such as the leverage ratio and grandfathering of debt from bail-in) risks undermining their benefits. It is also right to pursue a broader comprehensive resolution regime that extends to investment firms. The government will need to give further consideration to the authorities' oversight of shadow banking, which the ICB's proposals will incentivise, and to the transmission of risk within the financial system through bail-in.

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.

The Vickers Report: an assessment

Although the Vickers Report claims that its objectives are to “create a more stable and competitive basis for UK banking”, in practice it does not do so. Instead, its real purpose is to limit the contingent liability of the UK taxpayer to support the British banking system, and the Report does effectively deliver that important objective. But it does so at some considerable additional cost. Ring-fencing UK banks into two, or three, parts will add to transactional and operational costs for both banks and their larger clients. The ring-fenced UK retail banks will concentrate even more on financing UK property, and became even more subject to the vagaries of the UK property cycle. The investment bank, ie the non-ring-fenced part, will face more expensive and difficult funding conditions. The idea that retail banks must be saved from liquidation, but investment banks can and should be left to fail, is dubious. A better approach would have been to require banks to hold much more equity, and to intervene earlier to stop their downward spiral, rather than to impose such a separation.

Organizational Form as a Source of Systemic Risk

“Systemic risk” now occupies centre stage in discussions of bank regulatory reform. Systemic risk is often seen as a problem of size, operational complexity, interconnectivity and contagion. It is less often discussed in terms of the institutional framework of legal rules and principles within which financial intermediation takes place, and the organizational culture promoted by those structures. In this article we redress this deficit through an appraisal of Northern Rock, illustrating the consequences of its transformation from mutually owned building society to publicly held company on organisational culture. These changes had profound effects on the incentive structure of its owners and managers, as profit-maximisation and shareholder value became the driving forces within the firm, as in much of the rest of the UK banking sector. Thus, in addition to grappling with risk and uncertainty — and taking care to distinguish between the two — current efforts to construct a new macroprudential regulatory paradigm should recognize the importance of Frank Knight’s third key conceptual category-profit. Furthermore, in seeking to understand systemic risk, it becomes necessary to delve into micro-legal concepts such as property, trust, and contract that govern different forms of business to discern whether or not some modes of financial association create a greater degree of systemic risk than others. This is especially so when one organizational model comes to dominate retail markets, as did the publicly held company in the UK banking sector at the turn of the twenty-first century.

Innovation as a Determinant for Service Excellence inBanking

This paper examines what banks must do in order to provide superior services. The on-going research related to the current paper demonstrates that service excellence in the UK banking sector is comprised of a multiple set of integrated antecedents. However, due to its theoretical and practical importance, and further to its established linkage with service excellence, the current paper exclusively focuses on providing a review of innovation within the UK banking sector. The findings presented in this paper are based on a larger scale survey (n=260) of retail banking customers in the UK. Data was analysed utilising on Structural Equation Modeling, indicating significant impact of innovation on the delivery of service excellence.

A Century of Firm – Bank Relationships: Did Banking Sector Deregulation Spur Firms to Add Banks and Borrow More?

We study the effects of the 1971 UK banking deregulation on firms’ financial and investment policies. Deregulation and intensifying competition in the banking sector spurred firms to increase leverage and invest more in research and development, especially in local banking markets with many banks already present. Bank debt similarly expanded while trade credit contracted. The 1971 banking deregulation was a turning point in the evolution of firm-bank relationships during the twentieth century. Indeed, for more than 80 years prior to deregulation most firms had a relationship with only one bank: This was no longer the case after 1971.

UK Banking Regulatory and Market Framework: Post-Crisis Reform

UK Banking Regulatory and Market Framework: Post-Crisis Reform

Retail ring-fencing of banks and its implications

Financial stability remains a key theme globally in view of the Euro zone debt crisis. The latest strategy by Germany and France is to ring-fence the crisis among the PIIGS countries (Portugal, Greece, Ireland, Italy and Spain). In the United Kingdom, the big four major banks have all responded to the Independent Commission of Banking’s interim report key recommendation: ring-fencing retail operations into a separate subsidiary of any bank that wishes to operate in the United Kingdom. The report has clearly discussed the advantages and disadvantages of various types of subsidiarisation. Retail ring-fencing is considered a compromise as full subsidiarisation is too costly and operational subsidiarisation is too minimal. The Independent Commission of Banking published its final report on 12 September 2011. They recommended ring-fencing retail banking and a 10 per cent equity baseline. This article focuses on structural reforms of UK banks. It aims to address the question of financial stability from a wider European perspective. The first question is whether cross-border retail banking in the European Economic Area (EEA) is best served by branches or subsidiaries? The second question concerns the legality of setting up subsidiaries in the European Union (EU). Although there are no legal problems for UK-based banks setting up subsidiaries for their retail activities, there might be a legal hurdle for requiring foreign banks setting up subsidiaries in the United Kingdom. The third question concerns EU cross-border banking regulation and supervision. Are the ‘passporting system’ and the home country supervisory approach still applicable in this post-financial crisis era? Many factors influence the choice of setting up branches or subsidiaries. However, the general position is that branches are more suited for wholesale/investment activities because of ease of funds transfer. Subsidiaries are more suitable for retail banking because of the limited liability principle and extensive local network. Effective cross-border banking must be accompanied by effective supervision and resolution regimes. The ‘passporting’ concept under EU law and home country dominance are somewhat dated post-financial crisis. Host country control should play a dominant part in financial regulation, especially in the light of the importance of subsidiaries and the limited liability principle associated with them. The Icelandic bank crisis and collapse of Lehman Brothers International Europe illustrate the importance of host country control. Finally, the author argues that requiring banks to hold its retail activities in the form of subsidiaries in another European country is necessary to achieve financial stability.

Differing perceptions of non-executive directors’ roles in UK SMEs: Governance conundrum or cultural anomaly?

This paper presents a new model for the development of trust in the working relationships between managing director (MD) and non-executive director (NED) dyads in UK small- and medium-sized enterprises (SMEs). It proposes a NED role trust typology of NEDtells, NEDadvises and NEDacts. This typology is influenced by the literature on trust development in working relationships within corporate governance and in small business contexts. When UK SME NED role practice is mapped against this new model, different patterns of NED role trust emerge for MDs and NEDs. The MDs perceive a role biased towards NEDadvises, whereas the NEDs perceive a role that is balanced between NEDtells and NEDadvises. This dual role was described by one NED respondent as being ‘schizophrenic’. This paper presents and discusses these findings and the implications for the wider corporate governance debate on NEDs, with particular reference to the recent UK banking crisis. The new model presents a possible explanation for governance failure attributed to the NEDs’ behavior and recommends that further research investigate whether the CEOs and the MDs that also act as NEDs on other boards exhibit these different patterns of NED role trust. Do they exhibit another form of schizophrenia or are they chameleons, that is, able to switch between different patterns of NED role trust with ease? Or are they just NED role impersonators, analogous to a contestant on Stars in Their Eyes? “Tonight Matthew I’m going to be … a non-executive director!”

Modelling systemic liquidity risk with feedback effects in the UK banking sector

A liquidity risk stress-testing model which has been tested in the Dutch market and which considers feedback shocks induced by market participants is adapted and calibrated for generic use and then applied to UK bank data. Because the model is flexible and adaptable, it permits the robust investigation of different bank reactions to stressed market conditions, including buffer restoration, leverage targeting, the effect of severely stressed haircuts and systemic risk increases (through reputation degradation and enhanced contagion by other banks). Buffer losses owing to second-round effects are explored through reactions stemming from culprit and victim banks.