UK Financial Sector Research Articles

The Rise of Digital Banking in the UK Financial Sector and Its Impact on Commercial Banks

In the contemporary financial domain, the emergence of digital banks has revolutionized operational models in traditional commercial banking. This article delves into how digital banks, through advanced technology and customer-centric services, compel commercial banks to revaluate their operational and regulatory frameworks. Specifically, it focuses on the digital banking market in the UK, analyzing how digitalization and technological progress are driving the evolution of competitive dynamics within the financial sector. As one of the worlds foremost financial hubs, the UKs trends in financial market development have profound implications for the global financial system. The British government and regulatory bodies have proactively adapted to these shifts, framing policies that facilitate innovation while ensuring security and compliance within digital banking. This backdrop sets the stage for this report to explore the transformative impact of digital banks on traditional banking models in the UK, aiming to understand the regulatory adaptations and the overall influence of digital entities on the conventional banking landscape.

Binary Classification of Customer’s Online Purchasing Behavior Using Machine Learning

The UK financial sector increasingly employs machine learning techniques to enhance revenue and understand customer behaviour. In this study, we develop a machine learning workflow for high classification accuracy and improved prediction confidence using a binary classification approach on a publicly available dataset from a Portuguese financial institution as a proof of concept. Our methodology includes data analysis, transformation, training, and testing machine learning classifiers such as Naïve Bayes, Decision Trees, Random Forests, Support Vector Machines, Logistic Regression, Artificial Neural Networks, AdaBoost, and Gradient Descent. We use stratified k-folding (k=5) cross-validation and assemble the top-performing classifiers into a decision-making committee, resulting in over 92% accuracy with two-thirds voting confidence. The workflow is simple, adaptable, and suitable for UK banks, demonstrating the potential for practical implementation and data privacy. Future work will extend our approach to UK banks, reformulate the problem as a multi-class classification, and introduce pre-training automated steps for data analysis and transformation.

Who is unhappy for Brexit? A machine-learning, agent-based study on financial instability

In this paper, we assess the happiness cost of Brexit in the UK and the EU, using data from the Gallup World Poll. We implement a two-stage learning machine, using a naive Bayes classifier to extract happiness preferences of the population and then passing these onto an artificial neural network of attributes to generate dynamic happiness functions for each household, on an agent-based modelling framework. We find that there is a significant long-run cost in terms of both happiness and unemployment, which primarily affects the most vulnerable portion of the population. In addition, despite the expected instability in City's financial centre, the UK financial sector seems to be well equipped to deal with the repercussions, thus minimising the welfare costs for the country. Our findings extend the discussion of the economic costs of Brexit, by adding the welfare cost of the ensuing financial instability.

Who Is Unhappy for Brexit? A Machine-Learning, Agent-based study on Financial Instability

In this paper, we assess the happiness cost of Brexit in the UK and the EU, using data from the Gallup World Poll. We implement a two-stage learning machine, using a naive Bayes classifier to extract happiness preferences of the population and then passing these onto an artificial neural network of attributes to generate dynamic happiness functions for each household, on an agent-based modelling framework. We find that there is a significant long-run cost in terms of both happiness and unemployment, which primarily affects the most vulnerable portion of the population. In addition, despite the expected instability in City’s financial centre, the UK financial sector seems to be well equipped to deal with the repercussions, thus minimising the welfare costs for the country. Our findings extend the discussion of the economic costs of Brexit, by adding the welfare cost of the ensuing financial instability.

Open Banking: The Emergence of New Digital Business Models

Open banking has recently been advanced as a measure to foster competition and innovation in the retail banking sector. Since its introduction in the UK, a number of banks have created new digital business models (BMs) that offer individuals and businesses access to more personalized financial services. Yet, it is still unclear what new entrants (smaller and newer banks) have done to potentially disrupt incumbents (larger and well-established banks). To shed light on the innovations in BMs that have been initiated by digital banks to move away from traditional retail banking BM, seven digital BMs operating in the UK financial sector were examined using the BM innovation analysis framework. Our findings suggest that innovation in the new digital BMs has been achieved by building on the existing retail banking activities, developing new digitally enabled activities, and leveraging open innovation activities. Implications of our findings for researchers, managers and policy makers will be outlined.

Monetary policy transmission in the United Kingdom: A high frequency identification approach

This paper investigates the impact of monetary policy shocks on macroeconomic and financial variables in the United Kingdom using a new series of high-frequency monetary policy surprises. Employing our surprises as an instrument in a monthly SVAR over the UK’s inflation-targeting period, we show that a monetary policy tightening induces a decline in economic activity and in CPI, an appreciation of the Pound, a reduction in bank credit, and a significant increase in mortgage and corporate bond spreads. UK monetary policy also affects foreign credit spreads, consistent with the extensive presence of large international players in the UK financial intermediation sector. We finally propose a novel test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks constructed by Cloyne and Hurtgen (2016), and find that our high-frequency monetary policy surprises are not significantly affected by non-monetary news.

Are financial institutions’ counter-terrorist financing controls fit for today’s challenges?

This paper aims to provide insights into the latest developments of terrorist financing and the challenges faced by financial institutions in trying to counter this. Proposing the case for a greater use of social media and more agile monitoring systems, currently not espoused by industry best practice within the UK financial sector, the author shares insights of counterterrorist financing (CTF) typologies and hypothesises how a combination of both could strengthen current terrorist financing system and controls.

Socially Useless? The Crucial Contribution of Finance to Economic Life

Animosity towards the business of finance is ancient and persistent. As finance creates intangible value, its contribution is invisible to many observers, but the proposed remedy – increased statutory regulation – may heighten, rather than mitigate the exposure of taxpayers and households to recessions and speculative bubbles. Financial firms serve many useful functions, which individuals and households could scarcely undertake on their own: maturity transformation, matching lenders and borrowers at low cost, facilitating the transfer of risk and consumption across time and between people, monitoring, and diversification of investments. Banks reduce the transaction costs of financial activity, enabling people to spend their time more productively. Gross value added (GVA) by the UK financial sector amounted to £124 billion in 2016. Of this, 50% is exported. Contrary to the claims of critics, the sales and trading activity, alleged to be self-serving, accounts at most for 10% to 13% of financial services business in Britain. It is often argued that private-sector finance is short-term oriented. Whilst there is evidence that shareholders may be heavily discounting distant profits, the reasons for this could be policy uncertainty, and not irrationality. Moreover, the valuations of tech firms – whose positive cash flows lie far in the future – and low yields on corporate bonds suggest that investors are patient by historical standards. Much financial regulation assumes that providers ‘dupe’ consumers. But regulatory intervention is grossly miscalculated. The Financial Conduct Authority’s recent interest cap on payday loans shrank the market by between three and five times more than the regulator expected. Markets are not perfect, but regulation is often a poor substitute. The much-cited literature linking financial growth and adverse economic outcomes is simply too crude to warrant drawing clear policy conclusions. Studies linking financialisation with inequality are similarly ambiguous: the top ten countries for their share of finance in GDP are a mixture of high-, medium- and low-inequality countries. Complex financial instruments and speculation, both unpopular in the wake of the 2008 crash, are not harmful on their own. In fact, they transfer risks to those who can best bear it, whilst giving greater income certainty to vulnerable people. Until and unless the value of finance is properly understood, public policy will fail to harness its benefits and may well endanger public welfare.

A Treatise on Oil Price Shocks and their Implications for the UK Financial Sector: Analysis Based on Time‐Varying Structural VAR Model

In this paper, we examined the association among the energy sector stock, oil prices and stock market on the whole. We also considered the UK position from the net oil exporter to net oil importer and implications of the Global Financial Crises. Employing a Time‐Varying Vector Auto‐regressive framework on monthly data from January 1990 to June 2015 in which the sources of time variation were both the coefficients and variance‐covariance matrix of the innovations, this study found that historically oil price shocks have negatively affected the stock market, however the energy sector stock has always responded positively holding their title as hedge against oil shocks. It was also found that the shift from net oil exporter to net oil importer did not influence the association between the UK stock market and oil shocks much. Including the discrete break and subsampling of series led to controlling for the prior beliefs and agent's behaviour in the Pre‐GFC period. It turned out that the GFC had been a game changer and the stock market as well as the energy sector showed a positive and symmetric response to oil shocks. These findings have profound implications in terms of depressed global aggregate demand and oil shocks dynamics in the Post‐GFC world.

The UK regulation on alternative investment fund managers: a difficult compromise between two different legislative approaches

The transposition of the AIFMD in the domestic systems of the EU Member States has changed significantly the legal framework of reference for alternative investment fund managers. In transposing the Directive, however, the UK Legislature and Regulator succeeded in maintaining in the internal regulation some elements that could be able to attract financial players and investors from other jurisdictions. The article analyses these peculiarities and argues that due to them the UK financial sector could continue to develop in the future despite some new additional burdensome requirements. Brexit creates an even more challenging playing field that the UK will have to take into consideration.

Integration of Financial Markets in Post Global Financial Crises and Implications for British Financial Sector: Analysis Based on A Panel VAR Model

This study analyses the dynamics of integration among global financial markets in the context of Global Financial Crisis (2008) by employing a Panel Vector Autoregressive (VAR) model on the monthly data of nine countries and three markets from Jan 2003 to Oct 2015. It was found that there has been a shift in the association among the global financial markets since Global Financial Crisis (GFC). Moreover, the British financial sectors in Post- GFC world clearly showed a change in the association with the global financial sectors. Particularly, the emerging markets including China, Brazil and India showed a comparatively more significant impact on the UK financial sector implying the increased importance of the latter in the recent past. The German and USA financial sector also showed a change in its impact in the Post-GFC world. It showed that Germany and USA financial sectors have become competitive to the UK financial Sector as the surge in them lead to a relative response from the UK financial sector which could be associated with the portfolio adjustment.

Finance Sector Wage Growth and the Role of Human Capital

AbstractWe reveal the pervasiveness of the finance sector pay premium, across all OECD countries, as well as all sub‐sectors and occupations within the UK financial sector. Moreover, the UK premium has continued to rise despite the financial crisis. We show that earnings increase faster with value added in certain sub‐sectors of finance, compared to the general economy, providing evidence of profit‐sharing in these sub‐sectors. Other possible explanations, such as workers with higher qualifications or better cognitive skills, or technological change and differing job characteristics, can explain some of the finance sector pay premium, but are not sufficient on their own.

Board structure and corporate risk taking in the UK financial sector

This paper examines the relationship between board structure and corporate risk taking in the UK financial sector. We show how the board size, board independence and combining the role of CEO and chairperson in boards may affect corporate risk taking in financial firms. Our sample is based on a panel dataset of all publicly listed firms in the UK financial sector, which includes banks, insurance, real estate and financial services companies over a ten year period (2003−2012). After controlling for the effects of endogeneity through the application of the dynamic panel generalized method of moments estimator, the findings of this study suggest that the presence of non-executive directors and powerful CEOs in corporate boards reduces corporate risk taking practices in financial firms. The negative relationship can be explained within the agency theory context, where managers are regarded as more risk averse because of the reputational and employment risk. An increased power concentration is therefore expected to enhance the risk aversion behaviour of directors. The findings however, do not show any significant effect of board size on corporate risk taking in financial firms. As this study covers recommendations of the UK Corporate Governance Code on the role of corporate boards in managing firms' risk, the empirical evidence could be useful for corporate governance regulation and policy making.

Managing brand identity: effects on the employees

PurposeThe purpose of this paper is to better understand the brand identity management process from the employees’ perspective. Specifically, it explores how the different dimensions of brand identity management influence employees’ attitudinal and behavioural responses.Design/methodology/approachAn empirical study was carried out to test the proposed model. The sample consisted of 297 employees in the UK financial services sector. Hypothesis testing was conducted using partial least square regression.FindingsResults indicate that effective brand identity management can increase employees’ identification with their organisations. Specifically, the most influential dimension is the employee-client focus. Results also show that organisational identification is a key variable to explain job satisfaction, word-of-mouth and brand citizenship behaviour.Research limitations/implicationsThis study focusses on the UK financial sector. To explore the generalisability of results, replication studies among other sectors and countries would be useful. The cross-sectional nature of the study also limits its causal inference.Practical implicationsThis study shows the importance of brand identity management to foster positive employee attitudes and actions that go beyond their job responsibilities. The model developed may help organisations analyse the impact of managerial actions, monitoring the potential effects of changes in brand identity management amongst employees.Originality/valueAlthough numerous conceptual frameworks highlight the importance of brand identity management, empirical studies in this area are scarce. The current work extends previous research by empirically analysing the effects of the dimensions of brand identity management from the employees’ perspective.

A Treatise on Oil Price Shocks & Their Implications for the UK Financial Sector: Analysis Based on Time-Varying Structural VAR Model

In this paper, we examined the association among the energy sector stock, oil prices and stock market on the whole. We also considered the UK position from the net oil exporter to net oil importer and implications of the Global Financial Crises. Employing a Time‐Varying Vector Auto‐regressive framework on monthly data from January 1990 to June 2015 in which the sources of time variation were both the coefficients and variance‐covariance matrix of the innovations, this study found that historically oil price shocks have negatively affected the stock market, however the energy sector stock has always responded positively holding their title as hedge against oil shocks. It was also found that the shift from net oil exporter to net oil importer did not influence the association between the UK stock market and oil shocks much. Including the discrete break and subsampling of series led to controlling for the prior beliefs and agent's behaviour in the Pre‐GFC period. It turned out that the GFC had been a game changer and the stock market as well as the energy sector showed a positive and symmetric response to oil shocks. These findings have profound implications in terms of depressed global aggregate demand and oil shocks dynamics in the Post‐GFC world.

Navigating Institutional Complexity: The Production of Risk Culture in the Financial Sector

AbstractFollowing the financial crisis, financial sector organizations faced increased pressures to reform their ‘risk cultures’. In this paper, we argue that the emergence of regulatory and managerial attention to risk culture is symptomatic of pressures to redefine the fundamental ends of financial institutions and to rebalance the pre‐crisis emphasis on a logic of opportunity and risk‐taking with a logic of precaution and risk control. Based on the analysis of normative practitioner texts and on extended contact with regulators, advisers and corporate actors in the UK financial sector over four years, we show how this initial complexity ofendsis translated into uncertainty and conflict about themeansthrough which risk culture might become an object amenable to intervention. On this basis, we contribute to the growing literature on ‘institutional complexity’ by showing how organizational actors address conflicting pressures aboutbothends and means, and by discussing some key implications of their simplification strategies. Our analysis also contributes to recent studies of ‘means‐ends decoupling’, showing how means, ends and the object of intervention itself – risk culture – co‐evolve as they are reconstructed by organizational actors via their everyday practices.

Written Standards and the Social Licence for Financial Markets

Recent years have seen a rediscovery of the fact that a healthy financial and economic system cannot be based on the lowest common behavioural denominator of what is technically permissible under the black letter of the law. Something more is needed – variously described as ‘sound culture’, ‘professionalism’, ‘a sense of vocation’, ‘ethics’, ‘morality, and ‘best practice’. However, it is less clear how these can be achieved if it is not by reference to law or other forms of written standards (such as codes of conduct) since market participants need to understand what standards of behaviour are expected and encouraged to adhere to those standards. Yet use of law and other written standards potentially takes us back to behaviour referenced to the black letter of the law. This paper seeks to help answer the question of how law, regulation and written codes can stimulate behaviour that reflects a standard that transcends them. Among other things, taking the example of the UK financial sector, it looks across the range of written standards (from ‘hard’ law to private codes) that exist in the sector, and the enforcement mechanisms associated with them, to consider how written standards can come to affect behavioural standards. By using a ‘written standards map’ of those financial sector standards, it considers the inter-relationship (a) between tightly prescriptive legal and regulatory rules and those that are more aspirational (such as a legal requirement to achieve ‘fairness’) and (b) between written standards backed by ‘hard’ legal sanctions and those which depend upon softer or private enforcement mechanisms.

EU membership, financial services and stability

This paper examines whether EU membership enhances or diminishes the UK's financial sector stability, and therefore its prominence in global finance. The UK is host to the largest share of financial services in the EU, despite being outside of the Eurozone. An important reason is that, as a member of the EU, the UK has direct access to the Eurozone's financial infrastructure. If the UK leaves the EU (and EEA) banks and other financial services firms may continue to have access to the Single Market, but they are unlikely to have direct access to the Eurozone's infrastructure. Banks in the UK will no longer be direct members the Eurozone's payments system. The swap arrangement between the European Central Bank and Bank of England would have no legal enforcement mechanism. Resolution of cross-border banks would be more challenging with less incentive for a cooperative outcome. While some may welcome the reduced size of the financial system, not without reason, this could be achieved more effectively with domestic regulation than by leaving the EU. Given the uncertainty that would follow a vote to leave, there is a risk of capital flight.

The UK Financial Sector and EU Integration after Brexit: The Issue of Passporting

The UK Financial Sector and EU Integration after Brexit: The Issue of Passporting

Time-varying co-movements and volatility spillovers among financial sector CDS indexes in the UK

This article investigates co-movements and volatility spillovers between the three UK financial sector CDS indexes over time. We find sharp increases in the dynamic conditional correlations for all pairs after the Lehman shock, indicating evidence of contagion, and decreases for two pairs (banking-life insurance and life insurance-other financial) after the zenith of the European debt crisis, implying the emergence of diversification opportunities. Dynamic spillover index measures suggest that, although the banking sector was a dominant net transmitter of volatility, other financial sectors also became net transmitters for some periods, highlighting the importance of appropriate regulation of these two sector areas.