{ "title": "Fixing the Financial Sector: A Change the UK Must Bank On", "publication": "IMF Blog, July 17, 2013", "sourceUrl": "https://www.imf.org/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on", "canonical": "https://www.imf.org/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on", "overlayPath": "/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/index.md", "summary": "Growth has been flat for more than two years.", "sections": [ { "heading": "Macroeconomic context and urgency", "content": "- Growth has been flat for more than two years.\n- Per capita income is about 7 percent below its pre-crisis peak.\n- Unemployment is 7.8 percent; youth unemployment is 21 percent.\n- Credit to the economy remains severely constrained.\n- Recent data are encouraging; policies should capitalize on nascent signs of recovery to secure strong growth and rebalance the economy.\n- Fixing the financial sector, including by addressing banks’ asset quality, is a pre-requisite for a durable UK recovery." }, { "heading": "A multipronged policy approach", "content": "- Fiscal: Fiscal consolidation has been a brake on growth; policy should aim to offset the drag from planned near-term tightening, notably by bringing forward capital investment.\n- Structural: Accelerate structural reforms such as expanding vocational training, adopting new technologies, and attracting qualified workers from abroad to improve skills and competitiveness.\n- Monetary: Monetary policy should remain accommodative.\n- Complementarity: Financial sector repair must proceed urgently to normalize credit intermediation, improve the effectiveness of monetary policy, and ensure a durable exit from the crisis." }, { "heading": "Status of financial sector repair and outstanding concerns", "content": "- Progress noted:\n - Banks’ funding costs have come down.\n - Reliance on wholesale funding has declined.\n - Noncore deleveraging of bank balance sheets has progressed.\n - Regulatory capital ratios have edged up.\n - Profitability has improved recently, albeit modestly.\n- Key concerns:\n - The share of non-performing and delinquent loans is still high (estimated to average over 10 percent for Royal Bank of Scotland (RBS), Lloyds Banking Group (LBG), and Barclays).\n - Lender forbearance remains a concern.\n - Net bank lending to households and firms has not picked up since June 2012, notwithstanding a sharp decline in bank funding costs since then.\n - Credit to businesses has declined continuously since September 2008 (cumulatively by 12 percent).\n - Slowdown since 2009 in the build-up of provisions against expected losses, and of tangible capital buffers to meet unexpected losses, across major banks.\n- Implication: Weak bank balance sheets and inadequate capital buffers are constraining credit and recovery." }, { "heading": "Lessons from the U.S. experience", "content": "- U.S. approach emphasized building tangible capital and conducting credible stress tests backed by supervisor-approved capital plans.\n- Tangible capital (as a share of tangible assets) has risen by about twice as much since 2008 for major banks in the U.S. as for those in the UK.\n- Vigorous capital-building helped break the vicious circle between bank health and lending.\n- Credit recovery in the U.S. has been strong: lending to businesses increased by 30 percent since the trough in 2010." }, { "heading": "Building bank capital — three critical steps", "content": "- 1) Asset Quality Review follow-up:\n - The Prudential Regulation Authority (PRA) should ensure that individual financial institutions take the necessary measures to meet without delay the capital shortfalls identified by the Asset Quality Review (AQR).\n- 2) Comprehensive stress testing:\n - The system-wide stress tests planned for 2014 should cover a broad range of risks, employ sufficiently stringent scenarios, and aim for commensurately ambitious capital buffers.\n - Transparency over methodology, results and supervisor-approved bank-by-bank capital plans would significantly enhance the credibility of the stress tests.\n- 3) Measures to boost lending while building capital:\n - Capital building efforts should be based on a combination of new equity issuance, reduction of dividend payments, restrained remuneration, and balance sheet restructuring that does not reduce net lending." }, { "heading": "Strategy for the state-intervened banks (RBS and LBG)", "content": "- Objectives:\n - Return the banks to good health and eventually to private ownership.\n - Maximize taxpayer value, safeguard financial stability, strengthen confidence and competition in the sector, and minimize outward spillovers.\n- Importance:\n - Together, RBS and LBG account for almost two-fifths of the stock of UK net lending to the non-financial private sector.\n- Implementation notes:\n - Both banks have made progress in repairing their balance sheets and improving profitability, but significant challenges remain, particularly for RBS.\n - A sovereign backstop—if required—should be provided to meet a capital shortfall, as it would result in a boost to growth far offsetting its cost.\n\nSource: Krishna Srinivasan, July 17, 2013\n\n---\n\n\n References\n\n- IMF’s assessment of the UK economy\n\nSource: https://www.imf.org/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on" } ], "bullets": [ "[Markdown version](/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/index.md)", "[Structured JSON version](/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/index.json)", "[Bundle manifest](/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/bundle-manifest.json)", "Authors: Krishna Srinivasan", "Published: July 17, 2013", "Growth has been flat for more than two years.", "Per capita income is about 7 percent below its pre-crisis peak.", "Unemployment is 7.8 percent; youth unemployment is 21 percent.", "Credit to the economy remains severely constrained.", "Recent data are encouraging; policies should capitalize on nascent signs of recovery to secure strong growth and rebalance the economy.", "Fixing the financial sector, including by addressing banks’ asset quality, is a pre-requisite for a durable UK recovery.", "Fiscal: Fiscal consolidation has been a brake on growth; policy should aim to offset the drag from planned near-term tightening, notably by bringing forward capital investment.", "Structural: Accelerate structural reforms such as expanding vocational training, adopting new technologies, and attracting qualified workers from abroad to improve skills and competitiveness.", "Monetary: Monetary policy should remain accommodative.", "Complementarity: Financial sector repair must proceed urgently to normalize credit intermediation, improve the effectiveness of monetary policy, and ensure a durable exit from the crisis.", "Progress noted:", "Key concerns:", "Implication: Weak bank balance sheets and inadequate capital buffers are constraining credit and recovery.", "U.S. approach emphasized building tangible capital and conducting credible stress tests backed by supervisor-approved capital plans.", "Tangible capital (as a share of tangible assets) has risen by about twice as much since 2008 for major banks in the U.S. as for those in the UK.", "Vigorous capital-building helped break the vicious circle between bank health and lending.", "Credit recovery in the U.S. has been strong: lending to businesses increased by 30 percent since the trough in 2010.", "1) Asset Quality Review follow-up:", "2) Comprehensive stress testing:", "3) Measures to boost lending while building capital:", "Objectives:", "Importance:", "Implementation notes:", "[IMF’s assessment of the UK economy](http://www.imf.org/external/pubs/ft/survey/so/2013/CAR052213A.htm)" ], "alternates": { "markdown": "/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/index.md", "json": "/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/index.json", "bundleManifest": "/en/blogs/articles/2013/07/17/fixing-the-financial-sector-a-change-the-uk-must-bank-on/bundle-manifest.json" }, "generatedAtUtc": "2026-08-28T03:21:08.026Z" }