The financial meltdown of 2007 have made an enormous influence on UK economy, the existing UK debt is almost five times its GDP. (Turner Review, 2009) The current crisis has exposed number of weaknesses in the banking system. Banking plays a major role in UK in 2007 it added £58bn to the UK economy, equivalent to 4. 7% of GDP and employs on the 435, 000 people. (www. ifsl. org. uk) Major finance institutions in UK such as RBS, Lloyds, North Rock and roll were bailed out from failing by massive government support scheme, charging £900bn of duty payers' money. There were number of causes which led the existing financial crisis such as, overdependence on securitisation, complex derivative market, regulatory issues, credit ratings, remunerations etc. Maybe it's argued that banking companies ignored number of dangers it was exposed to and gambled with people's money. A lot of weaknesses have been uncovered in the functioning of the bank, so to develop a stronger bank operating system, banking commission is established to give advice on creating a strong bank operating system.
As per the Basel Accord only keeping more capital aside wouldn't be enough but need to build up a sustainable bank sector. The banking percentage has given recommendations in three broad areas i) The reform to Banking Structure, ii) New method of Regulation, & iii) Ethical Framework. We will look into all three areas in greater detail and point out the recommendations
Banking changed drastically in 1990's & early 21st century. Historically it was a straightforward business of collecting deposits and loaning to borrowers but this traditional business has almost vanished and many have argued that current banking products have grown to be more technical, expensive, & risky every once in awhile. Banks that have been seen as companies are more seen as a casino standard bank where people's money are gambled. Increasing customer claims, higher service fee, expensive interest rates, overdraft fees, complex products, etc. are a few of the glooms that customers show towards bank. There are a few recommendations given by the banking commission rate to build up a stronger bank structure, such as resolution regime, protecting depositors, formal separation of bank activities, breaking up investment banks, & derivative trading. These look good and promising to build up a stronger bank structure but yet there are a few implications to the above such as safeguarding the retail depositors up to £50, 000 by financial service compensation scheme. This could be argued that it might in fact encourage the bankers to do risky business, as the depositors would be guarded and bankers would like a free cover because of its depositors. The other shortfall been that the clients could be mislead by banking institutions declaring all its products are covered under financial service compensation scheme, so that it is important that clear signs or symptoms are put throughout and in vibrant letters to identify the products that happen to be covered and which not. The other suggestion given is 100% warranty on certain deposits which are invested only in safe belongings, this plan would currently create a confidence in market, inspire to trust on banking institutions again, reduce systemic risk, and bring traders to deposit their money into lenders again, but it could be argued that from recent financial meltdown a huge total of tax payers money was used to bailout the stressed banking institutions and buried UK in 5 times debts, so in future when there would be another bank failure more arrears and more duty payers money would be eroded with this structure.
The other suggestion been given is formal separation of banking activities. Huge banks which are diversified into different business should be put into three key categories, i. e. retail finance institutions concentrating on traditional business of caring for deposits and making lending options, corporate lenders providing services to commercial of middle size and above, finally the investment loan provider focusing on activities as advising corporate, government and financial institution. By this the depositors would be shielded from other riskier business, but Lord Turner have shown discomfort to slim banking, saying 'breaking up of lenders is not possible'. Jon Danielsson says 'slim banking is a bad idea because universal bank is not a riskier then slim banking'. the separation of lenders would protect the depositors, lower the risk for retail lenders, would be able to manage ethnic & ethical specifications, increase transparency, increase competition, easy entrance for new entrants, & easy to manage, but it offers some disadvantages as well such as, banking institutions wouldn't reap the benefits of economies of range & scale, it would limit the progress, separating banking companies would require close supervision by regulators, it might be expensive as it could require different preparation of accounts, auditing, etc, investment finance institutions will have to rely more on extra market to raise money then to utilize the deposits from retail lender, it would be an extended process, limit utilisation of resources, could be challenging for shareholders, and may be implied that if in future if we've a similar crisis to recent then investment banks would collapse first as a result of nature of its business, and retail standard bank would remain more robust, so to save lots of these investment bankers there would be no other option then to dominate the investment loan company. So depositors money could be used for takeover, so it could all use be the same at the end.
The other reason to current problems was the derivative trading, derivatives is the other device which bankers use for nurturing funds & defraying risk. Because of its complex characteristics and risk engaged many lenders collapsed and were exposed to systemic risk. You will find three common type of derivatives Front & Future, Option & Swaps. Bankers use different types of derivatives to lessen risk and guard against losses. Number of recommendations is given to use of derivatives as, all securities above a certain size shall only be tradable if authorized under stock market daily public list (SEDOL), investors, Speculator & dealers to disclose material position in a firm, whether placed as a stock, option or other derivatives; the purchase price and level of all securities and derivatives deals should be known when the trade takes place, thorough & ongoing overview of these developing practice. The other advice that might be added is traders to accurately analyze the risks involved & accordingly placed the capital apart to meet any loss. Many companies like Barings, Daiwa, Natwest Marketplaces, Allied Irish Lender, and a great many other have suffered huge loss.
To the above recommendations distributed by commission a number of recommendations could be given like charging bankers for underwritten services, or in good time's lenders to hold capital buffers with central lender.
From the existing financial crisis lots of regulation issues have been uncovered by the percentage. Some issues such as insufficient competition, ineffective market, customer dissatisfaction, higher prices, complicated products, poor quality, etc the fee argues that the current financial regulator is inadequate and cannot prevent from any future financial meltdown; it's very ample and inefficient. We are in need of regulation that could develop a more powerful financial system, compete, consumer shielded, & without adding taxpayers vulnerable. A broad awareness is directed at redevelopment of financial legislation. Fee has given advice in three different areas, 1) Consumer safety rules, 2) Prudential Rules, & 3) Systemic Risk Legislation.
Consumer protection Regulation: From the current financial meltdown it is argued that the financial regulators have reduction focused on consumer protection. It is been argued that the customers do not have a clearer understanding to the financial loans, financial risk, conditions & conditions, non safeguard to failure, overdraft fees, poor advice, asymmetric information, etc are some signs or symptoms which were seen from the recent problems. Number of advice are given to safeguard consumers, such as customers to easily copy products and accounts, not to overcharge on overdraft, established default adjustments to customer best interest, allow customers to choose on unauthorised overdraft, not to take advantage of existing customers, full and translucent disclosure on all products, easy and simple to understand terms & conditions, prohibit commission rate structures which incentivise mis-selling, and prevent obscure charges, or unfair asymmetrical deal terms.
To these recommendation there are a few implications that could be made are the guarding customers from mis-selling by prohibiting fee structure, maybe it's implicated that products could yet be mis-selled as every loan company needs to increase its sales, & make more profits, so senior professionals could pressurise giving goals, using different sales techniques, if not motivating sales staff by commission then motivating by offers, awards, etc. so it is important that the culture of your standard bank is so developed that it offers a fair and true advice onto it products, disclosing any charges, fees, undesirable effect a product may hold. The other way to protect consumers is by educating the consumers about their electricity, their privileges, and by performing regular surveys on the satisfaction on different products and services, regulator to be sure of review results and bankers which have higher rate of customer problems and dissatisfaction to be fined and instruct on product simplification.
Prudential legislation: The purpose of prudential rules is to develop a safe and sound financial system. Beneath the new prudential legislation no organization would continue to be 'too big to fail' it would break up the establishment so there would be no contagion, systemic risk to the highly interconnected financial sector. The other step it would take is to safeguard ordinary depositors, by placing basic deposits above all other creditors in liquidation choice, it would ensure all essential service are given by the organization. It really is been argued by the percentage that capital adequacy and accounting specifications such as Basel II, experienced created perverse bonuses for bankers to 'game' the rules and increase their leverage to the utmost permitted levels. It is argued that upsurge in regulatory supervision or increasing the administrative centre adequacy is not the solution to the issue, maybe it's helpful to some limit bu the main solution is to the banks itself to control the risk. Other recommendation that might be given is if the banking institutions want to make any high-risk investments then it must be approved by shareholders, and for this lenders need to simplify the shareholders voting procedure, such as online voting. The other implication could be that corresponding to Basel III suggestion banks must carry more capital but this may be argued that it could reduce the shareholders returns and may make difficult for banks to raise money.
In previous section we have investigated development of composition and legislation of the bank industry but the two aren't enough and would not work strongly until the overall culture of the business enterprise is right. A proper culture is essential for successful banking system. The institute of functional risk, (2010) says "a firm's organisational culture it prices and respected behaviours will under pin the chance culture, the openness, trust, integrity and integrity form a solid risk culture associated with an organisation". The payment recognises social change is difficult to bring about, and cannot by its nature be accurately prescribed. There were a number of failures to problems like, Non executive directors, auditors, credit history agencies didn't notify, NED's not performed their obligations well, commission rate and bonuses determined real estate agents and directors to have increased risk and sell flawed products. Commission recommends some changes on culture and corporate and business governance. It advises that NED's should make a larger use with their powers to independently appoint adviser to determine risk and spend more time on the job. NEDs should regularly develop their self with the changing business and work in best for the clients favour. It is been argued that remuneration & add-ons to the bankers is far too much compared to other services provided which motivates to short-term income by taking long-term risk. It is noted by loan provider of Britain that if the payouts to staff had been trimmed by 10% over the time 2000 to 2007, the UK banks could have retained an additional 50bn capital. Commission payment advises that rewards for mature professionals should be for longer-term service and must get on creating long-term shareholder value on the 5-10 time period. Rewards to elderly people at retail banking must be given on overall customer satisfaction, complaint levels and their fair resolution. Commission or bonus should be received on client satisfaction and fair quality of complaints. Banks need to develop a culture where it considers its customers first and then about the rest. As recommended by the bank fee " if the banking sector is to succeed public confidence then it requires to improve from being seen as self interested industry, to something more akin to a profession.
From the existing crisis government is among the most largest shareholder in the united kingdom bank operating system, by holding stake in Lloyds, RBS, & North rock, administration should work to guarantee the system is lasting, and in interest of long-term shareholders, collectors and customers. The federal government should sell significant stakes of the banks at the highest possible price for the taxpayer, with a need to market competitive bank sector. The other recommendations receive on corporate and business governance accounting and auditing. Accurate, clear financial reporting and auditing of finance institutions is essential to the stability and integrity of the financial system. Accounts and audits are the first alarms, however in current financial crisis it didn't notify the oncoming problems. The recent turmoil highlights the value of exact accounting tactics, and auditors to give a detailed, true & good report. It is argued that auditors didn't report the higher degrees of risk and leverage. There should be reinstatement of legislations that accounts represent true and fair statement of the positioning of a company and any risk it is exposed to must be plainly pointed out in the affirmation. Auditors to provide true and good affirmation company affairs, and report all significant risk factors which come to their attention. The other advice that may be given is to regularly give training to auditors to raised understand the company risk, their results and future effects it is expose to. 3rd party interior auditors to be preferred by the NEDs who regularly audit the company accounts, process, system, risk visibility and could separately give any recommendations to discover the best of the business.
The other criticisms made are of credit rating organizations (CRA) as there were number of imperfections to their procedure. The CRA are paid by the debt issuer and not choose the company who is buying them so that it could create a huge issue of interest. Advice distributed by Lord Turner "CRA should be at the mercy of registration and guidance to ensure good governance and management of issues of interest and ensure that credit scores are only applied to securities that a consistent rating can be done" other recommendation is CRA to be audited. The other suggestions could get to develop a strong culture is to develop a code of carry out for the bank industry. Every person directly or indirectly linked to a lender so banking development is vital for country's success. Banks need to build up a culture which promotes fairness, prudence, sustainability and positive contribution to contemporary society. Creating a right culture wouldn't be possible without support from the senior power, so compulsory formal honest behaviour training should get to all bankers.
So in this newspaper we have directed to give lots of recommendations that could be best to reform the banking also to protect it from any future turmoil. It would take time to use all the suggestions but of all the principle changes that require to be allied is to build up a stronger bank structure, then improvements in regulatory system, and the introduction of the culture. But most significant would be to develop a competitive market, by consumer safeguard, openness to financial products, remuneration policy, getting rid of commission payment on sales, providing bonus offer to directors on longer-term gains and on client satisfaction, and doing regular studies on consumer satisfaction.