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Commercial Banks and the UK Economy
The document presents a quick quiz on commercial banks in the UK, including questions about the largest bank by assets, the first new entry into the market in over a century, and banks that did not receive government aid during the financial crisis. It also discusses the significance of commercial banks, their profitability issues post-financial crisis, and the operational mechanisms of how they create credit and manage funds. The quiz contains logo identification questions and true/false statements to test knowledge on banking concepts and terminologies.
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Commercial Banks and the UK Economy
- 2. Quick Quiz onCommercial Banks Which one of the following is Britain’s biggest commercial bank – as measured by the total size of assets under their control? Royal Bank of Scotland Lloyds Banking Group Santander Banking Group Barclays Bank
- 3. Question 1 Which oneof the following is Britain’s biggest commercial bank – as measured by the total size of assets under their control? Royal Bank of Scotland Lloyds Banking Group Santander Banking Group Barclays Bank
- 4. Question 2 Which oneof the following was the first organic entrant to the UK banking market in more than 100 years when it received its banking licence in March 2010? Marks & Spencer Bank Tesco Bank Metro Bank Virgin Money
- 5. Question 2 Which oneof the following was the first organic entrant to the UK banking market in more than 100 years when it received its banking licence in March 2010? Marks & Spencer Bank Tesco Bank Metro Bank Virgin Money
- 6. Question 3 During thecrisis, the UK government took large holdings in several UK banks to restore financial stability. Which one of the banks listed below has NOT had any emergency state financial support? Royal Bank of Scotland Northern Rock Lloyds Banking Group Barclays Bank
- 7. Question 3 During thecrisis, the UK government took large holdings in several UK banks to restore financial stability. Which one of the banks listed below has NOT had any emergency state financial support? Royal Bank of Scotland Northern Rock Lloyds Banking Group Barclays Bank
- 8. Question 4 In 2014,what % of UK GDP came from financial and insurance services? 8% 18% 28% 38%
- 9. Question 4 In 2014,what % of UK GDP came from financial and insurance services? 8% 18% 28% 38%
- 10. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 2 3
- 11. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 2 3
- 12. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 HSBC 2 3
- 13. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 HSBC 2 3
- 14. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 HSBC 2 Lloyds Group 3
- 15. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 HSBC 2 Lloyds Group 3
- 16. Question 5: LogoRound Identify the bank with the logo (3 to have a go at!) 1 HSBC 2 Lloyds Group 3 Barclays
- 17. Question 6: HarderLogo Round! Identify the bank with the logo (3 to have a go at!) 1 2 3
- 18. Question 6: AHarder Logo Round! Identify the bank with the logo (3 to have a go at!) 1 Santander 2 3
- 19. Question 6: AHarder Logo Round! Identify the bank with the logo (3 to have a go at!) 1 Santander 2 3
- 20. Question 6: AHarder Logo Round! Identify the bank with the logo (3 to have a go at!) 1 Santander 2 ING 3
- 21. Question 6: AHarder Logo Round! Identify the bank with the logo (3 to have a go at!) 1 Santander 2 ING 3
- 22. Question 6: AHarder Logo Round! Identify the bank with the logo (3 to have a go at!) 1 Santander 2 ING 3 Deutsche Bank
- 23. Question 7: Thisone is tough! Identify the bank with the logo 1
- 24. Question 7: Thisone is tough! Identify the bank with the logo 1
- 26. Significance of CommercialBanks Credit for expanding businesses Financial services for households Externalities from financial stability Commercial banks and UK trade Important source of employment Instrument of monetary policy
- 27. Commercial banking isan oligopoly 27% 18% 18% 12% 10% 6% 4.2% 2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Lloyds Bank Plc (hq: London) Barclays Bank Plc (hq: London) The Royal Bank of Scotland (hq: Edinburgh) HSBC Bank Plc (hq: London) Santander UK Plc (hq: London) Nationwide Building Society (hq: Swindon) TSB Bank Plc (hq: Edinburgh) Co-operative bank (hq: Manchester) Account market share At the moment only 3% of personal and 4% of UK business customers switch to a different bank in any year (Source: CMA, August 2016)
- 28. Challenger banks arerelatively small A number of new banks are attempting to establish themselves in the UK financial system and challenge the dominance of the leading UK commercial banks TSB (Sabadell) Virgin Money Aldermore Metro Bank Shawbrook Handelsbanken
- 29. Barriers to entryinto banking sector • In oligopolistic markets, barriers to entry make it harder for new entrants to scale their business and make profits • Entry barriers might include: 1. Cost of IT systems and expense of establishing branches 2. Access to payment systems (e.g. cheque/card clearing) 3. Established banks have access to cheaper retail savings deposits from their existing customers 4. Banks which are viewed by investors as ‘too big to fail’ are seen as lower risk and therefore benefit from lower wholesale funding costs – this is an economy of scale 5. Customer resistance to changing accounts – including the time and inconvenience – this makes it harder to build customer numbers
- 31. Question True or False? Themain source of funds used by commercial banks to lend out to borrowers are the savings deposits of individual households and businesses
- 32. Question True or False? Themain source of funds used by commercial banks to lend out to borrowers are the savings deposits of individual households and businesses
- 33. Question True or False? Banksfirst attract deposits from people and then they lend it out to customers who need to borrow money
- 34. Question True or False? Banksfirst attract deposits from people and then they lend it out to customers who need to borrow money
- 35. How Banks CreateMoney Banks take deposits of money from savers and lend it to borrowers Banks then lend money to businesses, thus allocating funds between alternative investment projects
- 36. The Modern Reality •Banks create credit by extending loans to businesses and households – pure and simple! • They do not need to attract deposits from savers to do this • When a bank makes a loan, for example to someone taking out a mortgage to buy a house, or a business taking out a loan to finance their expansion it credits their bank account with a bank deposit of the size of the loan/mortgage. • At that moment, new money is created. “Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.” (Source: Bank of England)
- 37. Assets and Liabilitiesof a Bank Assets Cash Balances at Bank of England Loans (Advances) Securities (e.g. Bonds) Fixed assets (e.g. Buildings) Liabilities Customer deposits Money owed to bond holders Money owed to other banks
- 38. Cash in theBank!
- 39. Balance Sheet AfterNew Lending Reserves Currency Assets Liabilities Deposits Commercial banks before lending
- 40. Balance Sheet AfterNew Lending Reserves Currency Assets Liabilities Deposits Commercial banks before lending Commercial banks after lending Reserves Currency Deposits Assets Liabilities New Loans New Deposits
- 41. Balance Sheet ofCommercial Bank Other Assets (including Liquid Assets) Loans to UK Households and Businesses Assets (Uses of funds) Liabilities (Sources of funds) Capital (Equity) Wholesale Funding Retail funding (e.g. households’ current accounts)
- 42. How Commercial Banksmake a Profit In simple terms, how does a commercial bank make a profit?
- 43. Interest Rates onSavings and Loans 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Sight Deposits Time deposits Credit card Unsecured loans Secured loans Interest Rates (%) for Selected Savings and Loans in UK – Dec 2015
- 44. Interest Rates onSavings and Loans 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Sight Deposits Time deposits Credit card Unsecured loans Secured loans Interest Rates (%) for Selected Savings and Loans in UK – Dec 2015
- 45. Profits and Lossesfor Banks • Major UK commercial banks’ profitability has fallen quite significantly since the global financial crisis • Low profitability reduces the ability of commercial banks to generate fresh capital internally and reduces their resilience to future domestic and external shocks. • Key factors: 1. Significant rise in regulatory costs 2. Lower interest rates on loans has reduced trading incomes – for example, a fall in mortgage interest rates 3. Financial cost of previous misconduct - UK banks put side another £15 billion relating to past misconduct in their 2015 results, reducing pre-tax profits by around 50%. This includes the costs of miss-selling PPI
- 48. US Sub PrimeLending Crisis Mortgage delinquency rates for subprime conventional loans in USA from 2000 to 2014 11.9% 10.8% 19.9% 25.5% 25.9% 23% 20.6% 21% 19.1% 16.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2000 2005 2008 2009 2010 2011 2012 2013 2014 2015 Delinquencyrates
- 49. Economic & SocialRisks from Financial Instability Taxpayers (Bailout costs) Depositors (Risk of lost savings) Creditors (Unpaid debts) Shareholders (Lost equity) Employees (Lost jobs) Government (increased deficit)
- 50. Question What is themost important factor limiting the amount of new credit that a commercial bank is able to lend? a) The ratio of cash to deposits that a bank is required by law to keep b) The demand for loans from personal and business customers c) Caps on interest rates on loans and overdrafts set by the Bank of England d) The cost of borrowing funds from the wholesale money markets
- 51. Question What is themost important factor limiting the amount of new credit that a commercial bank is able to lend? a) The ratio of cash to deposits that a bank is required by law to keep b) The demand for loans from personal and business customers c) Caps on interest rates on loans and overdrafts set by the Bank of England d) The cost of borrowing funds from the wholesale money markets
- 52.
- 53. Some Key Definitions Bankingcredit An arrangement with a bank for a loan, or bank lending in general Bank A business that makes its profit by paying interest to people who keep money there and charging a higher rate of interest to borrowers who borrow money from the bank Bank capital Bank capital is the value of the bank's assets minus its liabilities, or debts Bank reserves Money and liquid assets (such as securities that can be sold quickly) held by banks in order to meet withdrawals by customers Banking system The way banks work together to make payments, make money available Co-operative bank A bank that lends money, collected from its members, at low rates of interest Internet banking The services provided by banks that only exist on the Internet Shadow banking Non-deposit taking financial intermediaries including investment banks, hedge funds
- 54.