AN unintended consequence of regulatory reforms intended to avert another financial crisis on the scale of 2008 is posing challenges for well known Scottish banks but they can’t expect much sympathy.

From January 1 last year large UK players were required to legally ring-fence their retail operations from activities such as investment banking and equities trading. The aim of the reform is to ensure unexpected shocks in the wider financial system do not stop banks providing services that consumers rely on such as mortgage lending.

Critics, however, say the reform may result in changes in the market that could ultimately result in consumers getting a poorer deal.

Jobs in doubt as Edinburgh-based bank quits mortgages

Competition in UK markets may intensify in the short term but then weaken as the ranks of competitors are thinned out as a result of the change.

The UK operations of giants such as HSBC have such big customer deposit bases to draw on in support of mortgage lending that they can make life extremely difficult if not impossible for some other players.

With interest rates in the UK pegged at record lows since the financial crisis engulfed the UK economy, mortgage lenders were already struggling to make money.

Increased competition from the likes of HSBC may have been a factor in some deciding to throw in the towel.

In May Tesco Bank, which has headquarters in Edinburgh, decided to quit the mortgage market. Sainsbury’s Bank, which is also run from Edinburgh, stopped offering new mortgages from September.

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Banks that have long dominated the Scottish market have also provided evidence that competition is hurting.

In April Royal Bank of Scotland’s former chief executive Ross McEwan highlighted “unprecedented” levels of competitive pressure in the UK mortgage market. Shortly before Mr McEwan left the bank in November RBS noted continued pressure in the sector.

The bank, which remains 62.4% owned by the taxpayer, will publish its annual results on Friday.

Last month Clydesdale Bank owner Virgin Money said the value of its mortgage book fell in the first quarter amid fierce competition from rivals.

Clydesdale Bank owner highights tough sector conditions as mortgage lending falls

Against that backdrop decisions made by leading banks in Scotland to slash their branch networks appear increasingly short-sighted.

The scale of the loss caused by the closures has been immense. In August figures from the Office for National Statistics showed the number of branches in Scotland had almost halved in a decade, from 1,505 in 2010 to 860 in 2018.

RBS, Clydesdale, Bank of Scotland and TSB all shut around 50 or more branches each in that period. The closures have continued since then.

The programme has left many areas without branches and rural districts have been hit especially hard.

The cuts have made it harder for people to access services and the resulting job losses have taken lots of money out of local communities.

Bank branch closures lead to £465m slump in funding for Scotland's small businesses

Banks can of course argue that the rise of internet banking has made some branches uneconomic. But banking is about more than numbers.

The empty branches that mar streets across Scotland send a signal of indifference and sit very ill with claims that banks want to support communities.

They have resulted in lenders squandering goodwill that they can ill afford to lose at a time when growing numbers of online players are also after their business.

While competition in mortgage markets is putting pressure on mutuals that compete with listed giants it is notable that some are using branches to help them stand out, in innovative ways.

Scottish Building Society opened its first Glasgow branch in November. Chief executive Paul Denton said then that branches could be a meeting point for the community and the wider stakeholder base as well as serving customers and marketing the society.

Newcastle Building Society recently opened a branch in a hub run by a community trust in Wooler, which had been without any bank branches since 2018.

This formed part of a programme to revamp and extend the society’s branch network, which it said involved re-imagining its locations and adapting its approach to suit local needs.

In its first half results announcement for 2019, the society hailed record levels of new mortgages and savings.

Net core residential lending of £220m in the first six months compared with a full year total of £160m for 2018.