New research from TowerGroup finds that the government of the United Kingdoms injection of 50 billion ($80 billion USD) into the UK banking industry will split the sector into two. Recapitalization will have a long-term strategic influence on all British banks, but there will be a notable business model difference between those that have received funding and those that have not.
The banks that have accepted funding will adjust to lower-risk strategies as the Governments representatives, in their new role as shareholders, prioritize the consumer and small businesses. Those banks that have not accepted funding have a short-term market advantage with their higher tolerance to risk. Strategic developments are, however, likely to halt until the new competitive landscape is better understood. And the non-Government-funded banks will adopt tactical business solutions in the short term.
This bailout is as much a pull as it is a push, says Bob McDowall, research director in TowerGroup European Banking & Payments Practice. The solution will change the strategic landscape of the UK finance sector and create a clear divide in business priorities for those that have and havent received funding for the foreseeable future. This intervention should be regarded as an economic rather than a financial solution.
The research also suggests that:
Banks will halt their spending on technology until the second quarter of 2009.
Nonbank financial operators such as supermarkets and automotive financial services companies may severely disrupt the new competitive landscape unless they are constrained by the same robust financial regulation the UK government is expected to impose on the banking sector.
The Governments national interests may lead to the inhibition of cross-border banking and acquisitions and have implications for the pan-European financial services industry landscape.
National interests may result in UK banks bringing their call centers back to Britain.
The recapitalization of UK banks will be accompanied by an extensive consumer awareness program, educating the public about the risks in choosing a financial institution.
The current financial crisis has exposed consumers gross lack of understanding about basic risks in selecting banks for savings and deposits, which has to be addressed, says McDowall.
D.C.