Over the last 18 months we have seen a significant change in the make-up and landscape of the UK banking system which is now ultimately controlled by the UK government. Northern Rock has been taken in house, large stakes have been acquired in Lloyds bank and Royal Bank of Scotland and the Bradford & Bingley was split up and sold on with the UK government retaining the more risky assets of the group. So will the UK banking system ever be the same again?

If you read the financial press at the moment you could be mistaken for thinking we are entering a new generation of risk-free banking and unlimited liquidity for consumers and businesses. While initially the government is pushing hard for increased liquidity and a reduction in investment into risky assets by UK banks, this will not last forever. Once the UK government has sold off its stakes in Northern Rock, Lloyds bank and Royal Bank of Scotland the system will ultimately be left to its own devices again.

The problem for UK government is that nobody will acquire a stake in a business which has limited growth potential so the authorities will need to increase the attractions of the likes of Lloyds bank, Royal Bank of Scotland and Northern Rock before they try and disinvest their stakes in the operations. In effect the UK banking sector is currently undergoing its own boom and bust cycle and we are currently at the bust stage!

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