The first bank run in the UK for 140 years may result in a review of the UK's tripartite regulatory structure, Fitch Ratings, the international rating agency, says in a special report. The Northern Rock case is the first big test of the UK's tripartite regulatory framework, and one immediate outcome has been a swift revision of the retail deposit insurance arrangements. The UK banking system's strengths include a high-quality accounting and disclosure regime, good insolvency arrangements, efficient payment and settlement systems and flexible labour laws. Fitch assigns the highest Banking System Indicator score of 'A' to the UK banking system.

The top five banking groups, in addition to large demutualised mortgage lenders, account for around two-thirds of mortgages outstanding in the UK and half of consumer credit outstanding. The banking sector as a whole has reported record profits in the past few years as a result of rising business volumes and increasing fee generation from the sale of a greater range of products. Strong corporate and wholesale businesses have increasingly compensated for the more sluggish UK retail business. Control of costs remains an important part of bank performance. Overall, the major UK banks are adequately capitalised, although regulatory capital ratios for some banks tend to be weaker than in most European systems.

There is little scope left for significant consolidation within the UK banking sector, although small institutions might still make attractive targets for the large ones. The UK remains an attractive market for international banks, although the scale of the major UK banks would likely make them immune to acquisition by all but the largest global banking groups. Several of the major UK banks are themselves increasingly acquisitive of foreign banks. Most recently, the acquisition by Royal Bank of Scotland Group (RBSG) of the wholesale and international retail businesses of ABN AMRO will shift the RBSG business balance further towards corporate and institutional banking, as well as enhance its Asian operations.

The UK banking sector overall is characterised by relatively high lending to the personal sector, but largely secured on dwellings. At the current level of interest rates, debt-service remains less than during the early 1990s when interest rates hit 15%, but progressively higher interest rates and higher non-discretionary expenses continue to squeeze household budgets. Significant increases in banks' loan impairment charges in respect of unsecured retail portfolios in the past couple of years have been partly driven by an increasing number of individual voluntary arrangements and bankruptcies, although there are signs that numbers are now stabilising.