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Trade in Services: The Banking Industry of UK and USA

Trade in Services: UK According to the statistics issued by government of UK, the total exports on services increased over 10% from over £ 72 million to more than £ 80 million respectively while the imports of the country increased by 8% from over £36 million to more than £39 million in 2009. Moreover, the balance among the two has increased by 15% with the surplus of over £41 million (Office for National Statistics, 2009). UK Banking Industry The global economic crises affected the banking system in United Kingdom adversely and turned everything upside down. The banks were at their peak of profits and performance. The credit crunch hit the entire economy resulting in the dropped amount of pretax profits earned by renowned banks like Halifax Bank of Scotland 72%, Lloyds TSB 70%, Barclays and HSBC also suffered huge setback in the form of dropped profits to 33% and 28% respectively. Some of the banks had suffered huge losses as well. For instance, the Royal Bank of Scotland declared, their first loss in the history of their operations, losses over 690 million pounds while the other banks had to take governmental funding to in order to survive in the markets (UK banks org, 2011). According to Norris (2008) the liabilities of the British banks were over 150 per cent of the British Gross Domestic Product or over 360 per cent of the national debt in UK.

The main reason for the failure of these institutions was blind trust on the creditors while issuing loans to them as well as their failure to accept the responsibility in the markets. The declining banking industry was then supported by the government of United Kingdom in the form of huge sum of money injected in these banks to help them save them from bankruptcy.

Trade in Services: USA

According to the analysis report of US economic census, the total exports on services were over 548 million US dollars in 2010 with an increase of 10 per cent exports as compared to 505 million US dollars for the year 2009. While the imports increased by 16% from over 380 million US dollars to more than 403 million US dollars in 2009 (US census bureau, 2011). US Banking Industry The banking industry in USA has undergone various changes since the beginning of eighties. The industry now has large number of small, medium and large size banks with market capital exceeding hundred billion US dollars. The consolidation of US banking industry is based on four main factorseconomies of scale, economies of scope, risk diversification and top management (Report Sure, 2011):

The past governmental regulations restricted the banks to operate in diverse geographic locations which limited the number of benefits they enjoyed from their business operations. After 1997, the Riegle-Neal Act allowed the banks to start their branches in the different states of the country. This act benefited the American banking industry to many folds.According to Glass Steagall Act in USA, the commercial banks were not allowed to engage into multiple operations like investment banking and retail banking. The Gramm-Leach-Bliley Act in 1999 came as a savior of banking industry in USA and it expanded the banking activities and their scope in the industry. The risk diversification is another force that derives the current banking industry in the USA. The geographic diversification of the banking institutions in America help them reduce the risks related to the failure of one particular economy. Top management is the 4th deriving force in the banking industry of USA. The relationship between the top management and the compensations at executive level has huge impact on the way the banks perform in the markets.

Organization of Industry: UK and USA

The term ³Bank´ in United Kingdom refers to the four types of banking institutions:High Street Banks, Business Banks, Investment banks and Central Bank respectively (Economics Help, 2011). On the other hand, the word ³bank´ in United States of America is commonly referred to the commercial banks operating there until late 1980¶s. There are two main types of financial institutions currently in USA: Depository and Non-Depository.

High street banks are the banks that offer services to the general public. The top banking institution in UK are HSBC, Halifax, Lloyds TSB, NatWest etc. (economics help, 2008). The business banks specialize in the services related to the corporate customers. Whereas the Investment Banks involve in the services related to the investment of money in the markets on behalf of the investors. While the Central Bank is the government owned bank. They are considered as a lender of last resort in the crucial times. All the other banks have to follow the rules and regulations devised by central banks. The bank of England is the central bank in UK which is responsible for the Monetary Policy as well (Economics Help, 2011).

The banking industry in United States is classified into two main categories that are depository institutions and non-depository institutions. The depository institutions are further classified into commercial banks and thrifts. The commercial banks may include money center banks and community banks while the thrifts includes saving banks, save and loans, credit unions. The non-depository banks may involve security dealers, investment banks, financing companies, insurance, mutual funds and pension funds (Saunders, 2000)

The banks in UK were regarded as respectable entities in the industry prior to the bankruptcy of Lehman Brothers which triggered the global economic crises on huge scale. Among the list of top ten companies in the United Kingdom, top four positions were held by the banks. Moreover, the banks ranked at number one in the list of eight sectors that accounted for 60% of value added and profitability for the economy of United Kingdom in 2007 (Value added scoreboard, 2007). The global crisis led to the formulation of various banking acts like Glass-Steagall Act in US banking industry which restricted the interstate banking system.One of the features of the US banking industry is declining number of banks operating in the country. By the end of 1999, there were around 10 thousand banks in the country as compared to over 15 thousand banks in the early nineties (Banks for International Statement, 2001). The branch banking and interstate banking has been increased in the country due to the Regle-Neal Act.

The regulatory framework in UK allowed many building societies to convert their operations into banks in 1986 by Building Societies Act. Many insurance firms also changed their operations into banking institutions. The mergers and acquisitions are other strategic transformational forces in the banking industry of UK. Furthermore, the bank diversification has increased the number of mergers and decreased the number of UK owned banks in the country (Infosys, 2007). While the mergers have allowed large number of US banks to start operations in the big cities like New York (Robert et al, 2004).

Summary This study briefly analyzed the banking system in UK and USA. The study findings showed that the banking system in UK is based on four main banking institutions; street banks, investment banks, central banks and business banks while the banking system in USA is based on two main categories; depository and non-depository institutions. Before the global economic crises, the banks in United Kingdom were very profitable entities in the economy and were among the top sources of economic success in the country. While the banking system in America was highly limited by the regulatory frameworks proposed on the commercial banks by the government. After late 90¶s the banking system in America started to grow by increasing franchises, interstate branches and mergers.

References Bank for International Settlements (ed.) (2001), G-10 Report on Consolidation in the Financial Sector, Also available from International Monetary Fund and Organization for Economic Cooperation and Development. De Young, R., Klier, T & McMillen, D. P (2004) The Changing Geography of the U.S. Banking Industry, The Industrial Geographer, Volume 2, Issue 1, pp. 29-48, retrieved on July 21, 2011 from http://igeographer.lib.indstate.edu/klier.pdf Dinsdale, H. and O¶Neill, J. (2009) International Trade in Services, retrieved on July 21, 2011 from http://www.statistics.gov.uk/downloads/theme_economy/international-trade-in-services2009.pdf Economics Help (2008) Top 10 British Banks, retrieved on July 21, 2011 from http://www.economicshelp.org/blog/uk-economy/top-10-british-banks/ (2011) Banking System UK, retrieved on July 21, 2011 from http://www.economicshelp.org/dictionary/b/banking-system.html Infosys (2007) UK banking Industry, retrieved on July 21, 2011 from http://www.infosys.com/finacle/finacle-connect/issue_07/images/kali.doc UK banks org (2011) UK Banks, retrieved on July 21, 2011 from http://www.ukbanks.org/ US census Bureau (2011) US International Trade in Goods and Services, retrieved on July 21, 2011 from http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf Value Added Scoreboard (2007) The top 800 UK & 750 European companies by Value Added, commentary and analysis, vol 1 and 2, retrieved on July 21, 2011 from http://www.bis.gov.uk/assets/biscore/corporate/migratedD/ec_group/07_321b Norris, F. (2008). The World's Banks Could Prove Too Big to Fail ² or to Rescue. The New York Times. Retrieved on July 21, 2011 from http://www.nytimes.com/2008/10/11/business/worldbusiness/11charts.html?_r=1&partner=rssny t&emc=rss&referer=sphere_related_content&referer=sphere_related_content&oref=slogin Report Sure (2011) Banking Industry, retrieved on July 21, 2011 from http://www.reportsure.com/commercial-banking-reports/banking_industry.aspx Saunders, A., (2000), Financial Institutions Management: A Modern Perspective, Irwin McGraw Hill, New York.