Expectations and returns: the tale of UK retail banks

Expectations and returns: the tale of UK retail banks
Changes to banking regulation since the 1980s have produced a financialised retail banking industry
focused on growth and RoE targets. The deregulation of finance in the 1980s (Moran 1990) allowed
retail banks to adapt their business models in a way that suited the interests of shareholders: this
has enabled credit creation through consumer and mortgage lending, as well as a search for new
retail financial products on which fee income could be earned. As a consequence, RoE has increased
significantly in the UK, as highlighted by DeYoung and Rice (2004) and by Haldane (2011). Moreover,
Haldane’s data (adapted from Capie and Billings 2004) highlights how the distribution of UK bank
RoE has shifted from one where over 30% of banks had a return of around 7% (until 1950) to a wider
distribution peaking at returns of 25% between 1980 and 2010, as seen in figure 28. This graph
illustrates how market conditions may have restricted profit extraction from banking activities
during the first half of the 20th century and how consecutive deregulation measures since the 1980s
have led to a rightward shift in the distribution, with both a higher median return and a wider
distribution as individual firm performance opens out.