On Thursday October 27, Santander UK reported that it lost GBP2.5 billion in deposits from its corporate customers. The European debt crisis has caused serious concerns over the ability of banks in the Eurozone to remain strong. Despite the fact the UK recognizes the need for banking reform, they are not doing nearly enough to fix it.

Customers are leaving Santander out of concerns that they will be unable to maintain a strong business presence. In the first nine months of the year, the bank’s pretax profits fell by 9%. Many customers are concerned that the bank will be unable to repay deposits to its customers.

One of the biggest reasons Santander lost bank profits was that they were required to set aside money for customers who were the victims of defective payment protection insurance programs. They had to set aside £538 million for that purpose.

Unfortunately,  the problem is only expected to get worse over the next coming years. Santander’s CEO said that they are going to face lower profits due to a variety of factors. Interest rates continue to decline, which will reduce revenues and discourage customers from making deposits. Also, there is growing uncertainty over the economic conditions and the regulatory environment in the Eurozone. Although Santender UK isn’t a part of the Eurozone, they are just as invested in the crisis. Customers are hoping these conditions won’t force Santander to implement new charges to maintain its bottom line.

Earlier on Thursday, the EFSF announced that all private institutions holding Greek debt would have to take a 50% loss on their investments. This is going to hit them pretty hard. The Greek debt haircut is just the tip of the iceberg. The EFSF may call for additional haircuts on debt holders for Italy, Portugal or Spain. These effects are going to hurt private lenders significantly.

The regulatory changes in the area have accounted for about £253 million in losses over the nine month period. Over the next four years, international capital requirements will increase to at least 7%. However, UK banks will need to maintain capital requirements of at least 10% due to the more stringent regulations by the Independent Commission on Banking.

The one redeeming feature of the report was that the number of mortgages have increased significantly over the past nine months. Unfortunately, the value of those mortgages have decreased substantially, largely due to the UK housing market crash. Earlier this month, the Royal Institution of Chartered Surveyors showed that the UK housing market has been starting to recover slightly. Unfortunately, more surveyors have felt that the prices were going to fall in the coming months. If housing prices continue to decline, Santander and many of the other UK banks are going to face more problems in the future.

Customers have taken some solace in the fact that the Fiscal Services Compensation Scheme backs their deposits by up to £85,000. However, they are still having concerns with Santander and all other banks that are tied to Greece, Spain, Italy or the other countries suffering from the eurozone’s debt crisis.