With a rich history dating back centuries, British banks are a magnet for investments and savings from around the world.
Over the past few decades, Britain has become a world leader in international finance. It is perfectly placed between time zones, with a robust legal system. This has made it a thriving centre for investment and currency trading, along with personal and commercial banking.
In this article, we look at the history of British banking – from the rise of the goldsmiths in the 17th century to the ‘Big Bang’ deregulation of the 1980s. We see how British banks gained a reputation for good governance and, in the wake of the 2008 crash, what they are doing now to restore and protect it.
Until the end of the 16th century, Britain was a feudal society, with virtually all of its wealth in land. A long period of stability under the Tudor royal family followed. It began to establish itself as both a trading nation and a centre of financial innovation.
During the 17th century, goldsmiths began to offer banking services to aristocrats and merchants. They accepted gold deposits in return for receipts that acted like modern-day cheques or banknotes1. Having gained a reputation for being reliable lenders and custodians of wealth, they gradually extended their services. The private banking sector was born. Some of its pioneers survived to become some of the famous financial brands we know today.
Alongside banking, other financial sectors developed quickly in London. The London Stock Exchange (LSE)2 and the Lloyd’s insurance market3, for example, both originated in coffee houses in the ‘Square Mile’ financial district. The Industrial Revolution (1760-1840) and growing international trade saw an explosion in the number of banks, especially in London. By the early 19th century, Britain boasted a thriving banking system of more than 700 private banks. It supported international trade across the British Empire4.
The Bank of England was founded in 1694 as a private institution, to act as the government’s banker and debt-manager5. Since the 19th century it has acted as the UK banking system’s ‘lender of last resort’. It offers loans to financial institutions experiencing difficulties to prevent widespread problems6. Known colloquially as the ‘Old Lady of Threadneedle Street’, it has played a vital role in maintaining the country’s financial stability.
With the support of the Bank of England, banks had the security and stability to raise large amounts of capital. They could expand operations and develop branch networks. It caused a transformation in the banking system in the 19th century. It went from being a collection of numerous small banks to a smaller group of much larger ones.
British banking weathered the effects of two world wars, a global financial crisis in the early 1930s and a banking crisis in 1974. But by the late 1970s, the UK government was eager to encourage greater competition in the industry. London was being left behind as a financial centre by New York. Frankfurt and Paris were even starting to threaten London’s position as Europe’s main financial centre.
On 27 October 1986, an event known as ‘Big Bang’ shook the London Stock Exchange. It paved the way for London to become the leading international financial centre it is today. A number of regulatory reforms came into effect on this date – initiated by the Conservative government of Margaret Thatcher. They were designed to end restrictive practices at the LSE, and ultimately make the British financial sector an easier, more efficient place to do business. It transformed London as a financial centre from a conservatively run club into a global market.
The banking system soon became intensely competitive, benefiting savers and borrowers. That attracted banks from the USA and Europe. It led to a radical change in culture in the City. The UK’s whole financial services industry rapidly expanded and diversified.
Since the global financial crisis of 2007/08, a number of significant changes have been made to the UK’s regulatory regime. In particular, two new regulatory authorities replaced the former regulator, the Financial Services Authority (FSA).
The Prudential Regulation Authority (PRA) is part of the Bank of England and is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms. The PRA’s objectives are set out in the Financial Services and Markets Act 2000 (FSMA). The PRA has three statutory objectives:
The biggest financial institutions are now subject to an annual ‘stress test’. This year, they will be assessed on whether they can withstand a Chinese property crash, recession and deflation in the eurozone, high levels of market volatility and low oil prices7.
The second regulatory authority, the Financial Conduct Authority (FCA), aims to make sure that financial markets work well so that consumers get a fair deal. This means ensuring that:
Meanwhile, the UK’s major banks have made huge strides in rationalising their business models, while new liquidity requirements have been introduced under a set of international banking regulations known as the Basel Accords8. These are designed to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector.
As well as the tougher regulatory environment covering banks, the UK also provides strong safeguards for individual depositors. The first £75,000 of cash deposits you hold in any UK-registered bank is protected by the Financial Services Compensation Scheme (FSCS). It means the FSCS will, subject to conditions, compensate you if the bank fails. It’s a ‘per person, per bank’ limit. So if you hold money with more than one bank you’ll be covered for the first £75,000 at each institution9. For joint accounts, the limit is £170,00010. In most cases for deposits, the FSCS will pay compensation within seven days of a bank failing. It will also pay any remaining claims, which are likely to be more complex, within 20 working days11.
The FSCS also covers insurance, investments and mortgages, but only up to certain limits. It depends on the product and only applies in certain cases12. See the FSCS website: www.fscs.org.uk for full details.
The FSCS doesn’t cover Britain’s Crown Dependencies. They are: the Isle of Man in the Irish Sea and the islands of Jersey and Guernsey in the English Channel. These offshore banking centres are not part of the UK. Each has its own government, legal system and financial regulator. However, each one is still closely tied to the British economy and its currency. Many British banks have operations in one or more of them. Each Crown Dependency has its own compensation scheme in place.
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1 An Introduction to English Banking History, Roger Outing, British Museum (see http://bit.ly/1SKuaBM).
2 London Stock Exchange corporate history (see http://bit.ly/1Kaw0bW)
3 Lloyd’s of London corporate history (see http://bit.ly/1GIeV73)
4 An Introduction to English Banking History, Roger Outing, British Museum (see http://bit.ly/1IyV3kY)
5 Bank of England corporate history (see: http://bit.ly/1KawDlV)
6 Bank of England corporate history (see: http://bit.ly/1e3KvlQ)
7 ‘Stress testing the UK banking system: key elements of the 2015 stress test’, Bank of England, March 2015 (see: http://bit.ly/1J5LHjk)
9 Financial Services Compensation Scheme website, see: http://bit.ly/1HeBV0J
10 Financial Services Compensation Scheme website, see: http://bit.ly/1dgDU6L
11 Financial Services Compensation Scheme website, see: http://bit.ly/1NbtOAw
12 Financial Services Compensation Scheme website, see: http://bit.ly/1Lo7qWb