NEEDHAM, Mass. — New research from TowerGroup suggests that the government's injection of £50 billion ($80 billion USD) into the banking industry in the United Kingdom will split the sector in 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. According to TowerGroup, the banks that have accepted funding will adjust to lower-risk strategies as the government's representatives and in their new role as shareholders, prioritize consumer and small businesses.
Those banks that have not accepted funding have a short-term market advantage with their higher tolerance to risk. But strategic developments are likely to halt until the new competitive landscape is better understood. And the nongovernment-funded banks will adopt tactical business solutions in the short term. "This bailout is as much a pull as it is a push," said Bob McDowall, research director in TowerGroup's European banking and payments practice. "The solution will change the strategic landscape of the U.K. finance sector and create a clear divide in business priorities for those that have and haven't received funding for the foreseeable future. This intervention should be regarded as an economic rather than a financial solution." The research also suggests:
- 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 U.K. government is expected to impose on the banking sector.
- The government's 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 U.K. banks' bringing their call centers back to Britain.
- The recapitalization of U.K. 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," said McDowall.
