The British banking market structure

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THE UK BANKING MARKET

The banking and money markets in the UK, like their respective markets in the United States, are not two distinctive mutually exclusive markets. Rather, they overlap each other substantially. We define the banking market in terms of major market participants — banks in this case — whereas we define the money market in terms of financial instruments traded. Since banks are also important dealers of money market instruments, it is natural that the two markets overlap.

First we examine the characteristics of the British banking market, focusing our attention on the type of banks and their major activities. We will also point out the mode of operation should it be significantly different from those in other markets.

Banks in the UK are a diverse group of financial institutions which are characterized by the fact that on the liabilities side they take deposits with relatively short maturity and that on the assets side they make loans for a variety of purposes with longer maturity, longer than the deposit maturity. In addition, many banks provide ancillary services, such as payment guarantee facilities, corporate financial advice, and investment management.

At present, banks in the UK are classified into eight groups for statistical reporting purposes: (1) retail banks, (2) British merchant banks, (3) other British banks, (4) American banks, (5) Japanese banks, (6) other overseas banks, (7) other (quarterly reporting small) banks, and (8) discount houses. Except for the first group of banks, all others are by and large engaged in wholesale banking, which involves relatively large-sum deposit taking and lending with narrow interest rate margins.

This classification of banks, as announced in August 1989 by the Bank of England, is based partly on functions, partly on ownership and partly on data-gathering convenience. Therefore each group does not necessarily represent banks with distinctive functions. Rather, many different groups of banks perform similar functions. The major function of financial intermediaries is to acquire "illiquid primary securities" while issuing "liquid indirect securities" to the nonfinancial sector. It is therefore easy for each type of financial institutions, particu­larly larger ones, to extend their services into areas previously specific to a particular type of banks, thereby blurring the grouping boundaries. In effect, as early as 1959, such possibilities were clearly noted in the Radcliffe Report because of the similarity of liabilities of financial institutions.

Table 1 shows major changes in the classification of banks in recent years. Prior to the enactment of the Banking Act 1979, financial institutions recognized as banks were the so-called "listed banks," which were under the Bank of England credit control scheme and submitted their returns to the Bank. In a sense, at that time banks were defined by the regulatory relation­ship with the Bank of England rather than by a formal charter. These banks were collectively known as the "UK banking sector." But there were a number of banks falling outside the Bank's control, yet performing similar functions to those of the listed banks.

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