Have we seen the end of large profits for the UK banking sector?
A report commissioned by the UK government has today been released with a suggestion that major UK banking situations should ready themselves for significantly smaller profits in the future. The report was commissioned by Gordon Brown in October 2008 when the banking sector began to show significant signs of strain and eventually collapse. So what exactly does this mean for the UK banking sector and shareholders?
There are major concerns in the investment markets regarding the apparent suggestion that tier 1 capital ratios should be increased from 4% to 7% for UK banks as this would significantly reduce their profitability in the boom times. However, during more difficult economic times the increased safety net of a 7% tier 1 capital ratio would significantly support the sector and hopefully ensure we do not see a repeat of the ongoing banking crisis.
However, shareholders will be dismayed to hear that literally overnight the potential profitability of the companies in which they hold shares would be severely dented. It is worth remembering that UK banks make up a large proportion of the FTSE 100 and hold a significant weighting at this moment in time. If profits are to be reduced in the future then inevitably the market capitalisation of the U.K.'s leading financial institutions will also fall, as well as their influence in both domestic and overseas markets.
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