UK Banking and Finance
a) Examine external environment for the UK banking and finance and compare it with world trends.
In the previous year, the external economic environment has greatly affected UK banking and finance, particularly the housing boom in the United Kingdom commencing in 2003 and peaked in 2005 together with the same level of boom in the United States mortgage market. The underlying context is globalization and technological innovation in banking and finance. Globalization linked economies so that economic shifts and changes in one economy affects the other as in the case of the mortgage market in the United States and the banking sector in the United Kingdom. Technological innovation also supported the linkage of economic sectors so that a downturn in one economy is likely to affect other economies. This finds expression in the mortgage market of the United States and its effect on the banking sector in the United Kingdom. The trend in the United States is the engagement in the sub-prime mortgage market to meet growing demand for housing. As such, many banking and finance institutions engaged in sub-prime mortgage, which in effect is approving loans for people who do not necessarily meet the credit rating criteria previously established. As a result, many people purchased homes on mortgage financing. As these loans matured, many were unable to pay the mortgage loans. This resulted to the sub-prime mortgage market crash in 2007. In the meantime, the United Kingdom also experienced housing demand. This encouraged new firms to engage in the sub-prime market or existing banks to establish sub-prime mortgage services such as Northern Rock. The sub-prime mortgage market crash in the United States affected the banking sector in the United Kingdom, particularly the banks that engaged intensively or almost exclusively on the sub-prime market. The crash in the United States signalled the problem that is also starting to heighten in the United Kingdom because of a number of reasons. One, large banks present in the United States and involved in the mortgage market were in the process of consolidating their losses so that these banks refused or had not ability to extend short term loans to other banks such as Northern Rock, which heavily relied on short-term loans from various banks for its sub-prime mortgage system to work. Another, banks in the United Kingdom also refused to extend further loans to the mortgage market or to financial institutions relying on short-term loans. This led to a credit crunch that eventually led to huge losses and bankruptcy as Northern Rock experienced. (Smith & Waples 2007; Gross 2008; International Herald Tribune 2008)
In other regions around the world, the banking sector in Asia and Latin America also felt the effect of the sub-prime market crash in the United States. In Asia, the banking sector experienced a slow down in financial transactions and cash flow as well as problems in credit maturity because of the decline in the retail sector because spending and consumption declined in the United States, which is a primary market for retailers across the globe. (Smith & Waples 2007)
b) Perform an internal audit of one of the banks.
Barclays is one the top banks in the United Kingdom. This is due in part to its exercise of sufficient internal control practices to support its sustainability target by balancing risks with expected returns. Its non-major engagement in the sub-prime mortgage market meant that the effect of the mortgage market crash in the United States only affected the bank to a certain extent but less than the effect on Northern Rock. The decision not to heavily engage in the sub-prime market is a matter of board decision. Corporate governance, in part, ensured the maintenance of the bank of its role as a leading bank in the United Kingdom and one of the largest in the European Union.
Since 2006, Barclay’s board is a sixteen-member team, ten of which are non-executive members, five are executive members, and the remaining seat is that of the Chairman. In terms of tenure, six of the non-executive members have tenure of three years or less, two non-executive members have tenure of three to six years, and remaining two non-executive members have tenure exceeding nine years. In terms of geographic representation, seven of the non-executive members are from the United Kingdom, one is from the United States, and two are from other regions. (Barclays 2006) By balancing representation, the bank is able to develop a sense of independence and integrity of its corporate governance, which is important in ensuring stability.
In addition, Barclays also engages in internal control practices. One is the conduct of regular internal auditing of both operations and financial condition of the bank. This provides the board with information on the status of the banks to support informed and sound decision-making. Another is the enforcement of the practice of thorough documentation as part of the accountability and responsibility of the bank to its stakeholders. Last is the engagement in open communications with stockholders through meetings discussing key points in its operation. (Barclays, 2008) The aggregate of these practices constitute good business practice for the bank. This does not ensure zero mistakes or failure, as the board admits, but at least the bank learns of areas that need change.
c) Examine the changes in consumer behaviour related to attitudes to banks.
According to the global survey of Unisys Corporation (2008), the primary concern of bank customers in the United Kingdom are identify theft and fraud in credit and debit. In particular, the concern is the possible access or misuse of personal information, especially in Internet bank transactions. Although, the credit crunch was already happening and the possibility of recession is emerging, majority of UK bank consumers were not concerned about meeting their mortgage and other obligations with banks. However, in the case of the younger age groups, almost half of the respondents made the admission of having thought about the way they can meet regular payments of their credit card payments, bills payment, and loans. This implies that consumers respond to signals from the banking sector and other consumers.
In the case of Northern Rock, many of its consumers trooped to its branches to withdraw their money following news reports of its bankruptcy because of the publication of the financial aid the bank received from the Bank of England. It is certain that the previous consumers of Northern Rock have placed their money in other banks considered to hold greater stability even if the interest rate may be less. For these consumers, their experience with Northern Rock largely affected their future financial decisions.
For other consumers who have not directly experienced the bankruptcy of banks, the case of Northern Rock constitutes a case in point in selecting a bank or assessing the extent of security they have with their present bank. This could affect consumer decisions reflected in shifts in preferred bank for both deposit and loans.
In effect, bank consumers have become more reactive as well as participative in their relationship with their banks, depending on the various circumstances involving risk to their money placed in banks. Informed consumers in turn change bank practices so that banks have to implement more value creating activities in order to draw and maintain consumers made up of depositors to bring the bank capital and credit holders as investment partners of banks.
d) Identify areas of their marketing—either customers, market or their marketing mix-that they should improve, in order to increase their UK turn over.
Like any bubble, changes become inevitable if the UK banking and finance sector wants to increase turnover rates. The solution is the integration of various factors external and internal to banks. External factors include improved regulation and effective laws that capture the needs and support the common objectives of the banking sector together with sound economic policies of the government that support growth of the other sectors that largely utilise the banking sector for their financial needs (The Boston Consulting Group 2008). As such, sound and effective regulatory policies for the banking sector supports the stability of banks that adhere to these standards. Moreover, growth in the manufacturing and retail sector would mean more capital circulating the banking sector created through domestic consumption and export returns. These external factors, although not within the direct control of banks, are important considerations in improving the turnover rates of the banks.
Internal factors include sound corporate governance and internal controls. These factors are important since these determine rational decision-making as well as the preparedness of banks in case of risks or contingencies (The Boston Consulting Group 2008). A case in point is Northern Rock, which decided to engage heavily in the sub-prime market by using a system of heavy reliance on short-term loans while extending mortgage loans to its consumers. This practice reflects poor corporate governance on the part of Northern Rock due to the overpowering interests of some board members over the others resulting to one-sided decisions. There was also poor internal control since although auditing was conducted, the results were not considered in decision-making. In contrast, Barclays has expressed its position and inclination towards the improvements in its board as well as the strict compliance with internal controls such as reporting and recording as well as building good investor relations through open communications. These factors improve turnover rate due to higher investor confidence, which means greater infusion of capital into the banking sector and higher turnover rate for banks.
Reference
Barclays (2006). Corporate governance: Corporate governance report. Viewed 26 June 2008, http://www.investor.barclays.co.uk/results/2005/annualreport/annualreview2005/doclib/ar_corporate_governance_report.pdf
Barclays (2008). Accountability and audit. Viewed 26 June 2008, http://www.barclaysannualreport.com/governance/accountability_and_audit
Gross, D (2008). The Mark-to-Market Melee: Did an obscure accounting rule cause the credit crunch?. Viewed 26 June 2008, http://www.newsweek.com/id/130029.
International Herald Tribune (2008). Crisis deepens for Northern Rock. Viewed 26 June 2008, http://www.iht.com/articles/2007/09/17/asia/17northern.php.
Smith, D & Waples, J (2007). Worst crisis for 20 years, say banks. Times Online. Viewed 26 June 2008, http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2412740.ece
The Boston Consulting Group (2008). Creating value in banking 2008: Managing shareholder value in turbulent times. Viewed 26 June 2008, http://www.bcg.com/publications/files/CVB_2008_exec_summary.pdf
Unisys Corporation (2008). Identity theft is top security concern for UK residents, according to Unisys Security Index. Viewed 26 June 2008, http://209.85.173.104/search?q=cache:V7Z8-eYaFbcJ:www.unisyssecurityindex.com/resources/press-releases/UK%2520SI%2520Index130508%2520FINAL.doc+consumer+attitude+towards+UK+banks&hl=tl&ct=clnk&cd=4&gl=ph&client=firefox-a
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