United Kingdom

Banking System

The UK banking sector is the third largest in the world after the US and Japan. In addition to having one of the largest commercial banking industries, the UK is also a major international center for investment and private banking. The UK banking sector’s strong international orientation is reflected in the substantial foreign presence and sizeable assets of foreign banks in London.
The number of authorized banks in the UK totaled to about 690 in 2004. Although the number of UK incorporated banks declined over the past decade there was a significant increase in their average size and financial strength. The total number of authorized banks increased largely due to the growing presence of European Economic Area (EEA) banks. Many of these do not have a physical presence in the UK but can accept deposits on a cross-border basis.
Assets and liabilities of the UK banking sector reached £4,165bn at the end of 2003, nearly three times the 1993 total. Although their share decreased somewhat during the past decade, foreign banks still held over half of UK banking sector assets in 2003. European banks accounted for nearly a half of this, followed by US and Japanese banks.
UK regulation Responsibility for the authorization and supervision of banks passed from the Bank of England to the Financial Services Authority (FSA) in June 1998. This represented the first stage in reforming the UK’s regulation of the financial services industry. The second stage took place in December 2001, when the FSA assumed its full responsibilities under the Financial Services and Markets Act 2000 (FSMA). This superseded the Banking Act 1987.
Financial Services Authority is an independent non-governmental body which exercises statutory powers under the FSMA. It is a company limited by guarantee, financed by levies on the industry. The FSA must report annually on the achievement of its statutory objectives to the Treasury, which is required to lay the report before Parliament. The FSMA requires the FSA to pursue four objectives: to maintain confidence in the UK financial system; to promote public understanding of the financial system; to secure an appropriate degree of protection for consumers whilst recognizing their own responsibilities; and to reduce the scope for financial crime. The main aspects of the FSA’s dealings with regulated firms include:
- Authorization: FSA admits firms to the regulatory system;
- Setting standards for firms: Prudential and Conduct of Business standards;
- Supervision: FSA monitors firms’ delivery of standards;
- Enforcement: FSA takes action against firms where serious problems arise;
- Financial Ombudsman Service and Financial Services Compensation Scheme: Independent arrangements for resolving complaints against firms and for paying compensation if firms collapse.
Bank of England is responsible for maintaining overall stability of the financial system as a whole. Since its responsibilities for supervising individual banks were transferred to the FSA, the financial stability role of the Bank has been to focus on identifying and limiting systemic financial risk. This involves close monitoring of the financial system infrastructure, particularly payments systems. The Bank also monitors economic and financial market developments, as part of an overview of the system as a whole.
Since May 6th 1997 the Bank of England has had operational independence over monetary policy, and its role as the Government’s agent for debt management and cash management was transferred to the Debt Management Office. Decisions on interest rate policy are made by the Monetary Policy Committee, chaired by the Governor of the Bank and composed of top Bank officials and outside members.
There is a Memorandum of Understanding between the FSA, HM Treasury and the Bank of England which explains how the three authorities will work together towards the common objective of financial stability. The Memorandum established, among other things, a Standing Committee which meets monthly to discuss individual cases of significance and other developments relevant to financial stability.
All major international financial institutions are represented in UK.