The Future of the UK Retail Banking Market: A New Landscape

Published by: Datamonitor

Published: May. 21, 2009 - 264 Pages

Table of Contents

DATAMONITOR VIEW

CATALYST

SUMMARY

ANALYSIS

Datamonitor predicts the UK banking environment will remain risk-averse and conservative over the next five to ten years

Lessons can be learned from past mistakes in retail banking

The current crisis is likely to result in a significant increase in the amount of regulatory intervention

Regulators are set to impose strong and potentially cumbersome regulation on financial institutions

Each proposed regulatory reform has been scored on its likelihood of implementation

The regulatory authorities are set to bring in a raft of macro-prudential measures

Macro-prudential policy will be pushed to the forefront of new regulatory principles

Counter-cyclical capital buffers would put a constraint on lending during an economic boom

Micro-prudential measures for individual institutions are high on the agenda for regulatory reforms

An overhaul of mandatory capital and liquidity ratios will restrict lending

The current regulatory reform will lead to more international cooperation on regulation

Increased regulation of cross-border activity will limit the number of foreign-based competitors in the UK

The collapse of Landsbanki and the Icelandic banking system has led to calls for reform of the system

Overzealous regulation could have a damaging impact on London as a major financial center

Banks must prepare to deal with regulation that will limit their power and may see talent moving abroad

Adjustments to the tax regime could lead to an exodus of top talent

Individual product regulation is generally seen as too distortive to be beneficial

Individual product regulation is too distortive for it to be introduced effectively

Regulators look set to come down hard on hedge funds and short sellers in an attempt to curb risk taking

The current crisis has been blamed on excessively risky activities and hedge funds look set to bear the brunt of regulation

More intrusive regulation and increased communication with consumers are other measures that regulators are keen to enforce

Intrusive, direct regulation is an important change that will have a significant impact on banks

Consumer attitudes show a fundamental change in their views towards financial services providers

Consumers are reducing the amount of credit they use

Consumers are looking to save more and cut down on their credit card spending

Consumers are aware of what they should be doing during the recession although it remains to be seen how many will reach their goals

Consumers trust online price comparison sites more than banks and building societies

The future banking environment could vary significantly depending on the extent of the new regulation that is introduced

Under a conservative scenario tight regulation makes life difficult for banks and consumers

Economic growth will be tempered by a more restrictive regulatory regime

Tougher regulation is not an unconditionally positive step regarding the level of competition in retail banking

Consumers would find more restrictions in place on their banking activities

More direct regulation will play a part in encouraging banks to improve their service and raise consumer welfare

Under a liberal scenario banks will enjoy slightly more regulatory freedom, which should be beneficial for the economy

The economy will rebound more quickly but regulators will need to be careful not to let it overheat

The level of competition may suffer if measures are not taken to curb dominance

Consumer welfare can be augmented through a subtle yet more hands-on approach than before

A liberal regulatory model could lead to a return to excessive credit if it is not managed effectively

APPENDIX

Supplementary data

Definitions

Credit default swap (CDS)

Glass-Steagall Act

Macro-prudential regulation

Micro-prudential regulation

Methodology

Further reading

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Impact of potential macro-prudential regulatory measures

Table 2: Impact of potential micro-prudential regulatory measures

Table 3: The impact of cross-border regulatory measures

Table 4: GFCI index of top financial centers, 2007-2009

Table 5: The impact of individual product regulation

Table 6: The impact of measures to curb excessive risk-taking activities

Table 7: The impact of other regulatory measures

Table 8: Lending to individuals, Q1 1988-Q4 1996

Table 9: Lending to individuals, Q1 1997-Q4 2005

Table 10: Lending to individuals, Q1 2006-Q3 2008

Table 11: Household debt as a proportion of income, 1987-2007

Table 12: GFCI index of top financial centers, 2007-2009

List of Figures

Figure 1: Total lending experienced strong growth between 1992 and 2004

Figure 2: Household debt as a proportion of income fell away after the recession of the early 90s

Figure 3: The majority of consumers do not intend to use credit to fund their lifestyle

Figure 4: The majority of respondents said they plan to save more in the future

Figure 5: The majority of respondents had saved more over the last six months

Figure 6: Banks and building societies rank among the most trusted financial institutions

Abstract

• Assesses and scores the likelihood of different regulatory proposals to be put into practice.
• Uses Datamonitor's Consumer Trends Survey to understand the recent change in consumer attitudes and how this is likely to impact the market.
• Discuss future scenarios that look at how the retail banking market will cope under two contrasting regulatory regimes.

• Datamonitor predicts the UK banking environment will remain risk averse and conservative over the next five to ten years. The market is set to be presented with more stringent rules, meaning that financial institutions will be faced with curbs on their undertakings.
• Online price comparison sites, which are generally subjected to less regulation than banks and building societies, are currently the most trusted financial institutions. Banks and building societies can learn from how online price comparison sites focus on the speed, convenience and transparency aspects of their service.
• Datamonitor interviewees recognized macro-prudential measures as a key factor in the future of regulation in the UK. A macro-prudential framework essentially looks to restrain the build up of imbalances in the financial system. One of the key ways in which this is done is through a closer relationship between the regulators and the central bank.

• Gain an insight into which new regulatory measures are most likely to be introduced.
• Prepare for the impact these measures will have on the future of retail banking in the UK.
• Delve into the mindset of consumers as they adapt to the new retail banking environment.

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