When Guernsey’s government this year mapped out a strategy for its banking sector, it announced plans to take a “red carpet approach” to banks interested in setting up on the island.

This energetic pursuit of new business signalled its determination to maintain — and ideally increase — the size of the sector which a government report describes as “fundamental to Guernsey’s success as a finance centre”.

But increasing the number of banks is a tough challenge. The island faces obstacles in expanding — or even stabilising — an industry that is still reeling from the 2008 financial crisis. In March, its Commerce and Employment department said it would “consider it a success if between two and four new banking licences could be granted in the next three to five years”.

The industry is assailed by heightened political scrutiny, a wave of new regulations and the economic turmoil that has led to a protracted era of low interest rates.

Yet there are growth opportunities for banks that specialise in supporting the niches that are characteristic of Guernsey — such as private banking, wealth management and investment services.

Another potential source of new business is in emerging markets. In October, Guernsey announced that it had issued a licence to the Guernsey branch of FirstRand, South Africa’s largest bank. Its arrival was a fillip.

Fiona Le Poidevin, former chief executive of Guernsey Finance, said it reinforced “the global and international nature of our banking industry”.

The search for new opportunities follows a period of rapid retrenchment. The number of banking licences — 48 in 2008 — fell by more than a third as banks such as Clydesdale and the Co-operative consolidated and withdrew from Guernsey. The number of staff employed in the industry fell by 4.5 per cent between 2005 and 2013, to 1,708.

Deposits have nearly halved from a peak of £157bn in 2008 to about £81bn in September (although they rose for the first time in 18 months by 4.5 per cent in the third quarter of this year). Much of the decline of recent years was driven by a sharp fall in “fiduciary deposits” from Switzerland. These investments, made by Swiss banks on behalf of their customers are a way of avoiding Swiss withholding tax, but their popularity has waned due to low global interest rates.

£81bn

Banking deposits in September 2014, down from £157bn in 2008

In general, the decline in deposits is largely because of low interest rates and higher liquidity requirements in home jurisdictions such as the UK.

Mark Bright, head of offshore businesses at Kleinwort Benson and chairman of the Association of Guernsey Banks, says: “Deposits are reducing with deleveraging.”

The aftermath of the financial crisis is also putting pressure on the sector through increased regulation. The banks are grappling with the new disclosure requirements that are being introduced across much of the world to tackle tax evasion. The new rules, including the US Foreign Account Tax Compliance Act, which came into operation in July, will require Guernsey’s banks to hand over information about their clients automatically to other countries’ tax authorities. Greater transparency will “have depressed business slightly” by adding to costs, according to Mr Bright.

4.5%

Fall in Guernsey banking staff from 2005–2013, to 1,708

British high street banks will also be affected by the UK Treasury’s surprise decision this summer to exclude the Channel Island and Isle of Man outposts of UK banks from the “ ring fence” introduced to protect high street banking operations from their investment banking arms. As the Crown Dependencies are not part of the EU, there is a logic to the decision, according to Mr Bright, though he adds: “We were always hoping it would be an exception.”

The decision means banks that route their Guernsey deposits to their London parent will be unable to use them in their retail business, exposing them to their potentially riskier investment banking business. But Ken Bradley, director of Barclays’ Guernsey operations, says customers may well be persuaded that it does not represent a significantly increased risk, given the rapid changes to the investment banking industry. “We always intended to be outside the ring fence,” he says.

The Guernsey regulators are continuing to talk to the Bank of England about the impact of the new ringfencing rules. But as with the other challenges, there is a sense of optimism in the industry about its ability to cope with changes.

Gavin St Pier, Guernsey’s treasury minister, says affected institutions are still assessing the implications but there is “a high degree of confidence” they will be able to manage within the new rules.

William Mason, director-general of the Guernsey Financial Services Commission, the regulatory authority, says the impact of the ringfencing rules will be less severe than often thought.

“I can’t see any reason why they would make the Channel Islands less attractive,” he says.

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