Analysis of the UK Banking System

A strong and efficient Banking system is a key to progress in a country.To achieve an efficient a banking system one should analyze the internal and external factors of that country. For this issue I have chosen ENGLAND banking system to know its internal and external factors faced by its banks? what kinds of banks are operating in uk?,what kinds of activities are performed by them?what are the sources of finance in uk?what is the evolution of banking in uk?what is the role of central bank in uk?…etc

First of all a question raise in our mind what is meant by system?System is an integrated collection of different part of a body which performed specific function for example banking system of uk it has many banks in parts which perform different functions like commercial banking,investment banking,specialized banking and central bank collectively known as banking system of uk.In uk banking system it has a central bank which is Bank of England .IT is the head of all the banks it control and regulate the affair of all schedule banks like HSBC, Barclay Bank and ROYAL BANK OF SCOTLAND all these banks deals in day to day functions of receiving deposits and advancing finances to the public.Banking system stability depend upon the external factors such as saving ,national income,industrial growth and development,government policies and internal factors such as bank ability to channel the deposit safely to the borrowers normally industrial sector.

Benefits of a strong banking system in uk is that it will channelize the idle funds from the hands of depositor to the one who required such finances to invest It in that place which is useful for the development of the uk.Strong banking system of uk is playing an important role in increasing the saving of the people by providing incentives by giving them attractive interest rates.The banking system of uk is also helpful for the creation of new industries by providing finances to the industrial sector.The banking system of uk is also providing finances for the promotion of trade and commerce.

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Banks provide finance to the industry and the public as well and charge interest on it and earn profit for the bank.A question comes in our mind are banks main finance provider for the industry externally or other sector contribute in it the most.i have gone through an article of colin mayer.in this article he compare the investment activities and sources of getting the finance in venture capital in some countries like uk, germany japan and other countries he concluded that the souces of funds and investment differ in different countries due to financial system,economic condition, geographical factors and sectors difference.For example the amount of fund required in germany and japan are mainly cover from banks,corporation sources in Israel and pension funds sources in UK.

Sources of finance analysis

In ENGLAND 44% OF THE FINANCES ARE COVER FROM BANKS BUT MAIN SOUCE IS PENSION FUNDS WHICH SHOWS 49% FINANCIAL SOURCING MEAN IN INDUSTRY.

Following data displays the sources of external finance for the industry in the four diferrent countries,showed some important facts. In Germany, banks provide the main source of finance for the VC industry, and pension funds. By contrast, in the ENGLAND pension funds provide the main source of finance for the VC industry, other institutional investors, and individual investors PLAY AN IMPORTANT ROLE IN FINACEING THE INDUSTRY OF MANY COUNTRIES as many companies as banks. Contrary to popular views, government atorities also play an important role for (typically local authority) funding plays a more important role in the United Kingdom than it does in Germany, and is negligible in the other countries.

Table 1. Sources of external funds for the VC industry

This table reports sources of funds of VC firms in Germany, Israel, Japan and the United Kingdom based on binary and not mutually exclusive responses to a question of whether or not a particular fund uses a certain source. Panel A displays the proportion of funds that report using a given source. Panel B displays the percentage of funds using one, two, three, or four or more sources.

• Mean values which are statistically different from those of the United Kingdom at the 10% level.
• Mean values which are statistically different from those of the United Kingdom at the 5% level.

Sources of funds for the Israeli VC are banks from the above figure it is shown, with industrial corporations (typically from the United States) being the single most popular source of funds. In Japan, non banking financial institutions (e.g., securities firms, credit card or leasing companies and mortgage institutions) are the single most important category of finance among Japanese funds, followed by banks and insurance companies.9 It is quite common in Japan for the owners/providers of finance for Japanese VC funds to be all affiliated with the same bank-centered corporate group, or to be otherwise related to each other. In over half of the Japanese funds in our sample, at least three of the five largest shareholder providers of finance are related to each other or affiliated with the same group.

VC funds in Germany tend on average to use fewer sources of funds than do VCs in other countries (Table 1, Panel B). By contrast, funds in Israel, Japan and the United Kingdom tend to use many sources of finance; in particular, about a third of the UK funds report using at least four different sources.10 Relying exclusively on bank finance is also very common in Germany: over 60% of the VC funds that raise money from banks use this source exclusively; the corresponding figure for the United Kingdom is about one-third, and for Israel about one-fifth. Surprisingly, despite the typical characterization of the Japanese economy as bank dominated (like Germany), only one-seventh of the Japanese VC funds in our sample rely exclusively on bank finance.

EVOLUTION OF BANKING IN UK AND ITS DEVELOPMENT STAGES :

The birth of modern UK Banks

Strange as it may seem, UK banking can trace its origins back to the days of the Roman conquest. During the period of the Roman conquest of Britain, Romans’ conducted two forms of banking business: one, called argentarii, of a professional nature; the other, called feneratores, of an amateur nature run by the elite nobles of the Roman Empire.

What was said to characterise this institution was the two-fold service of (a) receiving deposits and (b) advancing credit. “Modern” UK banks evolved in the 1530s., it was not really until approximately 400 years ago, during the mid-1600s, that London really started to make its position as a financial backbone of importance when goldsmith bankers started to emerge, following King Charles I seizure of gold deposited in the Tower of London and the English Civil War, as a safe-haven (away from the clutching arms of the Crown!) for the gentry and aristocracy to deposit their money and valuables. Shortly after this period (circa. 1677), there were a recorded 44 goldsmith bankers in London acting as ‘keepers of running cash’ – who ran their business on a ‘personal liability basis’. However, strict legal controls on how big goldsmith bankers could become (because of the strict ‘personal liability basis’), together with poor transportation and communication, combined to restrict the growth of these into national UK banks [evidenced of this can be seen in the fact that in 1784 the total number of UK banks exceed 100; but only 7 had more than one office].

The wind of change

Following a number of prominent UK bank collapses in the early 1820s, parliament finally relaxed the laws governing who could own banks to allow for joint stock banking (1826) [A notable exception to this was the establishment of the Bank of England as a joint stock bank some 200 years before this legislation].

Importantly, joint stock banking allowed the owners of UK banks to spread the risk among a number of proprietors. This, combined with the Industrial Revolution, better transportation and faster means of communication all resulted in a growth of more national banks in the UK. Prominent among these was the foundation, in 1833, of the National Provincial Bank of England (later to become National Westminster Bank – NatWest), the first UK bank established with the specific agenda of being a national bank.

Although UK banks began to expand nationally during this period, the services they (did and could) offered did not. Consequently, it was also around this time that another division in UK banks began to emerge; namely the formation of the Big Three banking sectors:

1. Clearing “High Street” Banks – even as recently as 1900 there were a reported 250 private and joint stock banks operating in the UK;
2. Merchant Banks; and
3. Other financial institutions; such as Building Societies – which came into being following 1874 legislation

The Bank of England founded in 1694 to act as the Government’s banker and debt-manager. Since then its role has developed and evolved, centred on the management of the nation’s currency and its position at the centre of the UK’s financial system.

The history of the Bank is very interesting one. Events and circumstances over the last three hundred or so years have change and influenced the role and responsibilities of the Bank. They have adopted the culture and traditions, as well as the expertise, of the Bank which are relevant to its reputation and effectiveness and responsibilities a central bank in the early years of the 21st century.The history of the Bank passed different situation and circumstances of to the economic and financial history, political history, of the United Kingdom.

If you want to get closer to the Bank’s history and are visiting London, the Bank’s Museum provides a unique insight into the history of the Bank and its business, alongside a great deal of material about the Bank today.

Key moments in the Bank’s history – a brief guide

King William & Queen Mary

When William and Mary came in 1688, public finances were not strong. The system of money deposit and advancing it(credit) was in not working efficiently. At that time a national bank was needed to mobilize the saving and investment,the nation’s resources.

MR Willium Peterson

William Paterson proposed a loan of £1,200,000 to the Government. In return the subscribers would be able to incorporate the Governor and Company of the Bank of England.

The Royal Charter

The money was raised in a some weeks and the Royal Charter was sealed on 27th July 1694. The Banking started life as the Government’s banker and debt-manager, with 17 clerks and 2 gatekeepers. In 1734 the Bank moved to Thread-needle Street, gradually acquiring land and premises to create the site seen today.

Commercial functions of the banks

The Bank managed the accounts of that time Government’s and made loans available to finance spending at times of peace and war. A commercial bank took deposits and issued notes.

The 18th Century

During the 18th Century the Government borrowed more and more money. These outstanding loans were called the National Debt.

1781: renewal of the Bank’s Charter

Dependency on the Bank of England was such that when its charter was renewed in 1781 it was define as ‘ the public ex chequer’.

The bankers’ bank

By now the Bank was acting as the bankers’ bank too. It was liable to fail if all its depositors decided to withdraw their money at the same time. But the Bank made sure it kept enough gold to pay its notes on demand.

The ‘Restriction Period’

By 1797 war with France had drained the gold reserves. The Government prohibited the Bank from paying claims of its notes in gold. This Restriction Period lasted until 1821.

The 19th Century

The 1844 Bank Charter Act tied the note issue to the Bank’s gold reserves. The Bank was required to keep the accounts of the note issue separate from those of its banking operations and produce a weekly summary of both accounts. The Bank Return, as it’s called, is still published every week.

Lender of last resort

In the 19th Century the Bank took on the role of lender of last resort, providing stability during several financial crises.

The First World War: 1914-18

During the First World War the National Debt jumped to £7 billion. The Bank helped manage Government borrowing and resist inflationary pressures.

Gold

In 1931 the United Kingdom left the gold standard; its gold and foreign exchange reserves were transferred to the Treasury. But their management was still handled by the Bank and this remains the case today.

Nationalisation 1946

After the Second World War the bank was nationalised. It remained the Treasury’s adviser, agent and debt manager.

Financial crises

During the 1970s, the Bank played a key role during several banking crises. The Bank was at the fore when monetary policy again became a central part of Government policy in the 1980s.

Operational independence May 1997

In May 1997 the Government gave the Bank responsibility for setting interest rates to meet the Government’s stated inflation target. The was enshrined in the 1998 Bank of England Act.

Managing the modern bank

The Bank’s governing body, the Court of Directors, as it’s known, is made up of the Bank’s Governor and 2 Deputy Governors, and 9 Non-Executive Directors (under the Banking Act 2009

There are different kinds of banks which are working in different parts of the world main banks are as follows all these banks are specialize in performing speacialized functions of banks.on the basis of different types of functions we have the following bank

Bank of England is the central bank of England perform fuctions of monetory policy,fiscal policy.issue of notes,bankers banks,lender of last resort to other banks

Alliance HYPERLINK “http://www.alliance-leicester-group.co.uk/”&HYPERLINK “http://www.alliance-leicester-group.co.uk/” Leicester plc

Based in the UK, provides personal and business customers a comprehensive range of mortgage, investment, personal banking and insurance products, cash transmission services and corporate banking facilities.

BankHYPERLINK “http://www.bank-of-ireland.co.uk/” of Ireland

Personal and business banking in Britain.

British HYPERLINK “http://www.bankfacts.org.uk/”BankersHYPERLINK “http://www.bankfacts.org.uk/” Association

Principal representative body for banks active in the UK, with over 300 member banks from more than 60 countries.

HSBC Midland HYPERLINK “http://www.banking.hsbc.co.uk/”Bank

Personal and business banking division of HSBC.

BankHYPERLINK “http://www.bankofireland.co.uk/” of Ireland – Northern Ireland

Bank that provides private and corporate services worldwide.

BankHYPERLINK “http://www.bankofscotland.co.uk/” of Scotland

Financial institution that provides personal banking, small-business banking and corporate services.

Barclays

Bank offers personal banking, student banking and international corporate banking.

Bermuda Monetary Authority

Responsible for the licensing of banks, deposit companies and investment businesses.

Bradford HYPERLINK “http://www.bradford-bingley-int.co.im/”&HYPERLINK “http://www.bradford-bingley-int.co.im/” Bingley International

Subsidiary of Bradford & Bingley Building Society, a savings and loan bank.

Bristol HYPERLINK “http://www.bristol-west.co.uk/”&HYPERLINK “http://www.bristol-west.co.uk/” West

Specialists in mortgages, savings and investments.

Cheltenham HYPERLINK “http://www.cheltglos.co.uk/”&HYPERLINK “http://www.cheltglos.co.uk/” Gloucester

Provides mortgages, investments, savings and loans.

HSBC Investment HYPERLINK “http://www.cibm.hsbc.com/hsbc”Bank

Provides the advisory and financing, equity securities, asset management, private banking and trustee, foreign exchange and capital markets trading, debt funding and treasury activities of the HSBC Group.

Citibank UK

Provides personal banking in the UK.

Co-operative HYPERLINK “http://www.co-operativebank.co.uk/”Bank

Provides banking services including Internet banking.

BankNet

Provides on-line Banking Service. A joint venture between MarketNet and Secure Trust Bank PLC.

Coutts Group

International private banking arm of the Royal Bank of Scotland Group offering investment, fiduciary and banking products.

First Direct

Member HSBC Group.

Halifax

Financial institution that provides personal financial services including mortgages, long-term savings accounts, home, motor and creditor insurance, retail banking, consumer credit and share dealing.

Hamilton Direct HYPERLINK “http://www.hdb.co.uk/”Bank

Division of HFC Bank PLC which provides unsecured personal loans and credit card products in the UK.

Julian Hodge HYPERLINK “http://www.jhb.co.uk/”BankHYPERLINK “http://www.jhb.co.uk/” Group

Banking and financial services group owned by the Carlyle Trust.

Legal HYPERLINK “http://www.landg.com/”&HYPERLINK “http://www.landg.com/” General Assurance Society

Insurance company offering financial products including mortgage, investment, savings and home, life and health insurance.

Leeds City Credit Union

Financial cooperative offering savings and loans products to employees of selected employers in the Leeds area.

Lloyds HYPERLINK “http://www.lloydstsb.com/homepage/0,1001,general,00.html”Bank

Financial institution that provides personal banking, small-business banking and corporate services.

Lombard

Financial institution that provides personal banking, small-business banking and corporate services.

National Savings HYPERLINK “http://www.nationalsavings.co.uk/”&HYPERLINK “http://www.nationalsavings.co.uk/” Investments

One of the largest savings organisation in the UK that offers savings and investment products guaranteed by the Government to personal savers and investors while contributing towards the Government’s funding needs.

NatWest

Financial institution that provides personal banking, small-business banking and corporate services.

Northern Rock

Bank that offers savings accounts, deposit accounts, residential mortgages, investment mortgages and offshore savings accounts.

Prudential

Provider of portfolio management services, financial advice, mortgages and personal loans.

Royal HYPERLINK “http://www.rbos.co.uk/”BankHYPERLINK “http://www.rbos.co.uk/” of Scotland

Bank specializes in corporate, private and offshore banking, as well as retail banking and private motor insurance.

Scotiabank Group

International Canadian banking group that provides retail, commercial, corporate, investment and international banking services to customers around the globe.

Smile

Internet bank, part of the Co-operative Bank PLC.

Standard HYPERLINK “http://www.standardbank.com/”BankHYPERLINK “http://www.standardbank.com/” London

International merchant bank of the Standard Bank Group that offers specialist banking services and promotes trade, investment and business flows with an emerging market focus on a worldwide basis.

Standard Chartered HYPERLINK “http://www.standardchartered.com/”Bank

International commercial banking group providing consumer, corporate and institutional banking and treasury products and services with a focus on emerging markets in Asia, the sub-continent, the Middle East, Africa and Latin America.

Standard Life HYPERLINK “http://www.standardlifebank.com/”Bank

Subsidiary of The Standard Life Assurance Company that provides mortgages, savings and online banking.

Triodos HYPERLINK “http://www.triodos.co.uk/”Bank

UK branch of the Dutch trust bank that offers savings accounts and investments products financing projects with social and environmental benefits.

Virgin Direct Personal Financial Service Ltd.

Bank that offers savings accounts, deposit accounts, residential mortgages, investment mortgages and offshore savings accounts.

Woolwich

Financial services organization that provides mortgages, loans, investments, banking and insurance products and services.

LIST OF BANKS OF ALL THE BANKS IN ENGLAND OPERATING TILL 2010

Uk major banks

THERE ARE 116 BANKS OPERATE IN UK ACCORDING TO FSA website

“There are three types of banks, High Street Banks, Building Societies, and Direct Banks. High Street Banks are the main banks, such as Royal Bank of Scotland, HSBC, NatWest, Citibank, and Barclays. Building Societies such as Woolich, Abbey National, and Halifax were created for those who wanted to save in order to buy a house and offer pretty much the same services as the other banks. Direct Banks such as Co-op (Smile.co.uk) and First Direct don’t have branches, but you can bank at First Direct at the Post Office and Co-op bank at their grocery outlets. They are telephone banks which have grown in popularity over the last few years…”

Different Types of Banks

* High Street Banks and Building Societies

High Street banks and building societies are commercial banking businesses whose primary market is consumer finance. These are the most common banks you will encounter.

* Investment Banks

An investment bank is a financial company, securities firm or brokerage house that purchases new issues of securities from private corporations and offers them to their clients. They form a syndicate in order to sell these securities to their customers and the general public.

* Private Banks

Private Banks typically provide a more personal and customised set of services than high street banks. Marketed to individuals with large incomes or high personal wealth, opening a private bank account usually requires a very large minimum deposit.

* Online-Only Banks

Online-only banks offer the same services as traditional High Street banks or building societies through electronic banking and the Internet. They normally do not have branches for their clients to use. Besides online-only banks however, a number of High Street banks also offer online services.

The banking system in the UK is highly concentrated with the top 10 banks having over 90% of market share.