The British banking market structure

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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