A Proposal on the Impact of Global Financial Crisis on the UK Banking Industry
Chapter One
Aim and objectives of the study
The main aim of this study is to examine the impact of global financial crisis on the UK banking industry.
Specifically, the study sought to:
- Determine the implication of the global financial crisis on banks performance.
- Determine the extent of the impact of the global financial crisis on the UK banking industry.
- Identify the factors responsible for the global financial crisis in the UK banking industry.
CHAPTER TWO
LITERATURE REVIEW
Conceptual framework
Financial Crisis
A financial crisis is a sudden wide-scale drop in the value of financial assets, or in the financial institutions managing those assets (and often in both). A financial crisis may be triggered by a variety of factors, but the situation is typically aggravated by negative investment sentiment, fear or panic. A financial crisis often sparks a vicious circle where an initial decline sparks fear by investors that other investors will pull their money out leading to redemptions and increasing declines.
The Global Financial Crisis.
Bernanke (2015) defined Global Financial Crisis as a worldwide economic downturn. It is a period of general decline or depression in economic activity characterised by mass unemployment, general fall in in profits, wages, interest rate, consumption, expenditure, investment, bank deposits and loans, factories closure and construction of all types of capital goods come to a standstill.
Impact on the UK Banking System
In a globalised world, transactions are carried out in different countries in integrated markets. The world has over the past two decades headed towards liberalisation and deregulation, with the goal of integrating world markets. UK markets, although not well integrated into the world market, have been facing serious destabilising effects since the emergence of the global financial crisis in July 2008. The capital market has been shrinking: major international hedge funds have been withdrawn; and the international credit line has faded out of loadable funds for domestic industry. Soludo (2009) summarised the impact as follows:
- Tightening of liquidity due to net forex outflows and lower monetization of oil earnings
- Further tightening of liquidity as lines of foreign credits enjoyed by UK banks were called in.
- Depression of the capital market and drop in the quality of part of the credit extended by banks for trading in the capital market (liquidity pressures as loans not fully serviced or repair)
- Greater loan-loss provisioning both due to capital market pressures and decline in growth of economic activities.
- Potential exchange rate risks on foreign lines due to depreciation of the exchange rate
- Liquidity pressures push up domestic interest rates which if not addressed could pose systemic threat
- Global credit crunch and re-pricing of risks push up interest rates on lines of banks’ balance sheet in response to the crisis and higher provisioning, leading to lower profitability.
Theoretical Framework
New Classical Macroeconomics Theory
Hoover (2013) believes that the New Classical Macroeconomics suggests a rejection of the Keynesian economics and a revival of classical economics, the new classical school began with Lucas (1981) attempts to provide micro foundations for the Keynesian labour market.
Keynes`s view was that recessions occur when aggregate demand falls largely as a result of a fall in private investment causing firms to produce below their capacity. Producing less, firms require fewer workers, and thus employment falls. Firms, for reasons that Keynesian economists continue to debate, fail to cut wages to as low a level as job seekers will accept, and so involuntary unemployment rises. The new classical rejects this step as irrational. Involuntary unemployment would present firms with an opportunity to raise profits by paying workers a lower wage. If firms fail to take this opportunity, then they would not be optimizing.
Business cycle theory
Business cycle theory opined that the economy is often buffeted by unexpected shocks. Shocks to aggregate demand are typically unanticipated changes in monetary or fiscal policy.
Theories of business Fluctuations
A business cycle or fluctuation is the upward or downward movement of economic activity, which occurs around the growth trend ( Colander, 2004). These fluctuations can be observed in any number of economic variables such as consumption, investment, unemployment and GDP among others.
CHAPTER THREE
Research Design
Nachmias and Nachmias (1984) observed that, research design is a blueprint crafted to address problems to scientific inquiry.
This study will adopt a longitudinal survey design in obtaining, analyzing and interpreting data.
Data sources
For this project data will be collected from the Thomson Reuters Eikon for all financial companies listed in UK Stock Exchange.
Population and sampling procedure
The research is designed to examine the impact of global financial crisis on the UK banking industry. All financial companies listed in UK Stock Exchange will be used as study population and sample size.
CHAPTER FOUR
DATA ANALYSIS TECHNIQUES
The model designed for this study, which explains the relationship between global financial crisis and the UK banking industry is given as:
NSM = f[FOREX, INRATE, EXREV, FORIN]
In order to eliminate abnormality in the data to be generated, and to avoid heterosedacticity of the data, the data will be transformed into logarithm resulting in the model shown below.
CHAPTER FIVE
EXPECTED OUTCOME
By the completion of section four, we are expecting to examine the impact of global financial crisis on the UK banking industry.
POTENTIAL CONTRIBUTION OF THE STUDY
The report of this study would be adopted by policy planners, government agencies, financial analysts and the masses. Apart from contributing new knowledge to academic discipline, the study serve as a good secondary data for other researchers who might be interested in conducting a further similar research in the area of the impact of the Global Financial Crisis.
REFERENCES
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- Ajakaiye, O and Fakiyesi, T (2019)”Global Crisis Discussion Series,” paper8: Nigeria
- Avgouleas, E. (2008) ‘Financial Regulation, Behavior Finance, and the Financial Credit Crisis in Search of a New Regulatory Model’ Retrieved from http;//papers.ssrn.com on 20/11/08.
- Avgouleas, E. (2008) „Financial Regulation, Behaviour Finance, and the Financial Credit Baker, Dean (2008) “The housing bubble and the financial crisis,” Center for Economic and Policy Research.
- ECA and APF (2008) Development finance in Africa: from Monetary to Doha. Document prepared by the Economic Commission for Africa and Africa Partnership forum for the Eleventh meeting of the African Partnership Forum, held on 17-18 Nov. 2008
- Goodhart, C.A.E., (2008) “The background to the 2007 Financial Crisis”, International Economics and Economic Policy 4 pp 331-346
- Han, K.C; Lee, S.H., and Suk, D.Y., (2008), “Mexican Peso Crisis and its Spillover effects to emerging market debt”, Emerging markets Review 4, Issue 3, 310-326
- Mizen, P. (2008)”The Credit Crunch of 2007-2008: A discussion of the background market reactions and policy responses”, Federal Reserve Bank of St. Louis Review 90, Issue 5, p531567
