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UK banking sector set to shrink in the short term

Comments by David Mills, a member of the Bank of England's Monetary Policy Committee, seem to indicate that the Bank of England is readying itself for a significant reduction in the size of the UK banking sector. It goes without saying that the sector is under pressure in the short term although the main reason for the expected reduction in the future is purely than simply because of a change in capital requirements.

It is well-known that the Bank of England, along with the Financial Services Authority (FSA), is currently pushing through a number of changes which will see banks forced to keep more capital and "near money" assets in reserve to back their operations. This will obviously take away much-needed capital from the core business and ultimately this is where the shrinkage will come in the UK banking sector. While David Mills believes that the short-term pain will be more than offset by the long-term gain of a safer and less volatile banking system, there are those who do have reservations about his comments.

However, one thing is for sure, the UK banking sector which entered the current recession will be almost unrecognisable compared to the one which will be in place after the recession is over.

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