Lending Trends In UK And The Bank of England’s Proposed Reforms For Credit Unions

The importance of city of London as a global financial hub is largely on account of the city’s dynamic business environment, the predictability of the British legal system, the usage of English as the accepted business language, and the attractive draw of London as a cosmopolitan city. The city in most of its history has been able to attract a critical mass of talented intellect in the financial sector and into the other related professional services sectors and benefits from the development of the single market of financial services throughout the previous decades and more recently from the introduction of the single currency system in continental Europe.

Banking activities include mainly traditional retail and business services, international finance, wholesale finance, private banking services and wealth management. In the financial services sector, the above-mentioned segments are in combination the largest contributors to the British economy. These services not only represent about half of the revenues but also half of the workforce, gross value-added and annual taxes of the financial services sector. Nearly a quarter of the overall banking revenues comes from international and wholesale banking activities related to the European Union.

Presently nearly half of the global financial firms have their European headquarters based in London, with more than a million people working in this sector in the United Kingdom, which includes banking, insurance & reinsurance, asset management and market infrastructures. Add to that related professional services (including accounting, legal, advisory and other services), the total headcount would easily cross 2.2 million people. The financial services sector contributes around 11 per cent of the British Gross Domestic Product (GDP) in terms of total revenues, out of which half relates to domestic activities, while the other half relates to international banking and wholesale business related to the European Union and other overseas markets. This represents nearly 24 per cent of all of the European Union’s financial services and generates nearly 6.6 per cent of the gross value added to the GDP each year in the United Kingdom.

The Financial Services industry thus is pivotal to the British economy. In the year 2018, the United Kingdom Financial Services industry contributed an estimated £75.00 billion to the Exchequer, which is about 10.9 per cent of United Kingdom’s total tax receipts. By some estimates, business related to the European Union accounts for as much as one-quarter of the industry’s annual revenues, which underlines the importance of agreeing on a post-Brexit deal for the Financial Services industry.

The consequences of Brexit, especially for the financial services sector, however, depends on the agreement arrived at between the United Kingdom and the European Union, which is not in the public domain yet. Currently, financial services are regulated provided unhindered across the borders under simplified provisions. Without a special agreement however, the European Union passports currently in widespread use could become useless for business activities between both the economic blocks post Brexit. The European Union third country provisions for non-EEA companies are very limited and too insecure for intensive relations to be built upon in trade and services. Knowing that London is the leading global financial hub, an appropriate agreement needs to be arrived at, to ensure sustainable and affordable financial services for investors, businesses and end consumers in general.

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Current lending regime and proposed changes

The Bank of England is hopeful that British banks, thanks to their extensive contingency planning, would be able to withstand a no-deal Brexit should it so happen. The Bank's Financial Policy Committee (FPC) which met on 2 October 2019 opined that the entrenched Brexit uncertainties, particularly in the weaker global growth environment, has continued to materially weigh on the British economy, including business investment, the prices of British assets and flow of foreign capital into the United Kingdom, most notably in the commercial property markets and in the leveraged lending markets. In a statement it said that majority of the British banks and insurers are 'strong enough' to deal with the situation and will continue to lend to customers and businesses in a scenario that is increasingly becoming more complex. The statement also said that the biggest risks of disruption to British users of financial services 'have been addressed'. However, the FPC did offer up some words of caution, saying that without appropriate action being taken by the European Union authorities there could be a disruption to cross-border financial services in the event of a no-deal Brexit.

The British banks on their part are, however, confident of dealing with the emerging scenario no matter what. They have put in years of preparation for this event and have made adequate provisioning. They are however cautious of the fact that a slowing business growth environment will eventually put a dent on their profitability as well. The problem in this scenario is not the cost of credit or availability of credit, but the quality of the loan asset that will be created. The banks caution that more fundamental aspects of the British economy and a with-deal Brexit are key to the smooth transition of the British economy from this period of turmoil to better periods ahead.

What’s worrying the banks now is not the availability of funds but the business disruptions that will take place due to Brexit. Most of the British banks and international banks headquartered in London will face massive disruption in the movement of personal will surely curtail their operations in the time to come. The banks in their meetings with the officials of the United Kingdom government and the officials of the Bank of England have urged them to assist them to deal with this issue more proactively.

The Bank of England has recommended reduced capital requirements for registering credit unions with the intention to remove barriers to competition in the sphere of lending. While prior reforms have led to the formation of many new banks, none of them has been able to assume a scale and size to take on Barclays, Lloyds, HSBC or Royal Bank of Scotland.

Credit unions are non-profit, member-owned organizations structured as co-operatives that offer savings products and grant loans and to individuals who are not well off. The segment is tiny but helps those who find it hard to access banking services and potentially could seek high cost-loans from outside the banking system.

The net result of the changes would be to reduce overall capital requirements of credit unions by roughly one-fourth.

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