Banking in Crisis Can the lessons of the past help us to prevent another banking collapse in the future? This is the first book to tell the story of the rise and fall of British banking stability in the past two centuries, and it sheds new light on why banking systems crash and the factors underpinning banking stability John Turner shows that there were only two major banking crises in Britain during this time: the crisis of 1825–6 and the Great Crash of 2007–8 Although there were episodic bouts of instability in the interim, the banking system was crisis-free Why was the British banking system stable for such a long time and why did the British banking system implode in 2008? In answering these questions, the book explores the long-run evolution of bank regulation, the role of the Bank of England, bank rescues and the need to hold shareholders to account j o h n d t u r n e r is Professor of Finance and Financial History at Queen’s University Management School, Queen’s University Belfast Cambridge Studies in Economic History Editorial Board PA U L J O H N S O N University of Western Australia S H E I L A G H O G I LV I E University of Cambridge AV N E R O F F E R All Souls College, Oxford GIANNI TONIOLO Universita di Roma ‘Tor Vergata’ G AV I N W R I G H T Stanford University Cambridge Studies in Economic History comprises stimulating and accessible economic history which actively builds bridges to other disciplines Books in the series will illuminate why the issues they address are important and interesting, place their findings in a comparative context, and relate their research to wider debates and controversies The series will combine innovative and exciting new research by younger researchers with new approaches to major issues by senior scholars It will publish distinguished work regardless of chronological period or geographical location A complete list of titles in the series can be found at http://www.cambridge.org/economichistory Banking in Crisis The Rise and Fall of British Banking Stability, 1800 to the Present John D Turner University Printing House, Cambridge CB2 8BS, United Kingdom Cambridge University Press is part of the University of Cambridge It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence www.cambridge.org Information on this title: www.cambridge.org/9781107609860 © John Turner 2014 This publication is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2014 Printed in the United Kingdom by Clay, St Ives plc A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data ISBN 978-1-107-03094-7 Hardback ISBN 978-1-107-60986-0 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate Contents List of figures List of tables Acknowledgements Introduction: Holding shareholders to account page vi vii ix Banking instability and risk shifting 15 The evolution of British banking structure and stability since 1800 35 Major and minor British banking crises since 1800 66 Banking stability, shareholder liability and bank capital 102 Averting or creating banking crises? The lender of last resort and bank rescues 140 Banking stability and bank regulation 173 Restoring banking stability: Policy and political economy 204 Bibliography Index 221 244 v Figures 3.1 3.2 3.3 3.4 5.1 5.2 6.1 6.2 6.3 7.1 vi UK joint-stock bank mergers, 1870–1920 UK bank failures, 1792–1930 Monthly returns on UK bank stocks, 1830–2010 Annual returns on UK banks and the stock market, 1830–2010 Aggregate capital-to-deposits ratio for the British banking system, 1885–2007 Aggregate capital-to-total-assets ratio for the British banking system, 1885–2007 Amount of bills and notes under discount by the Bank of England (£’000), 1824–1828 Amount of bills and notes under discount by the Bank of England, 1857 Bank of England assets as a percentage of nominal GDP, 1790–2011 Total paid-up capital, liquid assets and government securities held by UK banks, 1880–1960 page 42 52 57 59 128 133 146 150 171 179 Tables 2.1 3.1 3.2 3.3 3.4 3.5 3.6 A hypothetical bank balance sheet page 20 Joint-stock banks in Britain, 1826–1899 39 Joint-stock bank branches and shareholders, 1844–1899 40 Bank mergers in 1918 43 The rise of national banks in Britain, 1900–1930 45 British banking in 1931 47 Distribution of deposits, assets and employees of the major domestic deposit-taking institutions, 2006 50 3.7 Bank failure rates in Britain, 1800–1914 54 3.8 Number of banks in returns series, 1830–2007 56 3.9 Banking instability in Britain, 1830–2010 58 3.10 Real GDP before, during and after major and minor banking crises, 1830–2010 62 4.1 Bank of England notes in circulation and securities and bullion held, 1821–1826 68 4.2 Country-bank-note circulation, 1821–1826 69 4.3 End-of-month share prices (£) of Scottish banks, 1857–1858 79 4.4 Profile and crisis experience of major secondary banks 90 4.5 Quarterly house-price inflation, RPI, M4 lending and GDP, 1971–1975 91 4.6 UK household indebtedness and interest rates, 2000–2010 94 4.7 UK mortgage market, 2000–2009 94 4.8 UK housing market, 2000–2010 96 4.9 Major UK banks and the financial crisis 97 5.1 Size and failures of Scottish provincial banks, 1747–1864 105 5.2 Bank failure rates for England and Scotland, 1792–1826 106 5.3 Director vetting of share transfers and ownership limits 110 5.4 Probated wealth of individuals who died whilst owning bank shares 113 5.5 Socio-occupational status of bank shareholders 115 vii viii 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 6.1 6.2 6.3 6.4 6.5 7.1 7.2 List of tables Banks with unlimited shareholder liability that failed during crises, 1836–1878 Average returns (per cent) on British bank-share prices in the months after the City of Glasgow Bank failure Capital of English limited- and unlimited-liability banks, 1874 Reserve liability and uncalled capital of British banks, 1885 British bank capital, 1900–1958 The capital position of the top six London clearing banks, 1958 Total shareholder funds/total assets (per cent) of major banks, 1975–2007 Published capital and reserves of the London clearing banks in 1958 and 1959 Bank of England’s half-yearly balance sheets, 1824–1828 Subscribers and guarantors of the Yorkshire Penny Bank Ltd Support provided in cash to UK banks from the Treasury, 2007–2011 Contingent liabilities of the Treasury arising out of financial crisis, 2007–2011 Effect of financial interventions on UK net public-sector debt Distribution of deposits of UK residents with UK institutions in 1962 and 1970 Regulatory capital of UK banks in 2001 and 2006 119 122 126 127 129 130 134 135 146 158 168 169 170 187 200 240 Bibliography Revell, J R S ‘Solvency and regulation of banks: Theoretical and practical implications’, Bangor Occasional Papers in Economics 5, 1975 Richards, R The Early History of Banking in England, London: P S King & Son, 1929 Richardson, J and Stephenson, M ‘Some aspects of regulatory capital’, FSA Occasional Paper Series 7, 2000 Robb, V ‘The genesis of regulation’, Financial Stability Review, 29–41, 1997 Rockoff, H ‘Walter Bagehot and the theory of 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1996 Watt, H The Practice of Banking in Scotland and England; With Observations and Suggestions on the Renewal of the Bank of England Charter, on the Principles and Regulation of Joint Stock Banks, and on the One Pound Note Circulation, London: Simpkin and Marshall, 1833 Webber, A ‘Reserves and reserve ratios in British banking, 1870–1960’, Centre for Banking and International Finance Discussion Paper 19, 1985 White, L H Free Banking in Britain: Theory, Experience and Debate 1800–1845, 2nd edn., London: Institute of Economic Affairs, 1995 White, L H ‘The evolution of Hayek’s monetary economics’, mimeo, Athens: University of Georgia, 1995 White, L H The Theory of Monetary Institutions, Oxford: Blackwell, 1999 Wilcox, M G ‘Capital in banking: An historical survey’, in E P M Gardner (ed.), UK Banking Supervision: Evolution, Practice and Issues, London: Allen & Unwin, 1986 Wilson, A J Banking Reform: An Essay on the Prominent Dangers and the Remedies They Demand, London: Longmans, Green & Co., 1879 Bibliography 243 Winton, A ‘Limitation of liability and the ownership structure of the firm’, Journal of Finance, 48, 487–512, 1993 Winton, J R Lloyds Bank 1918–1969, Oxford: Oxford University Press, 1982 Withers, H and Palgrave, R H I The English Banking System, Washington, DC: National Monetary Commission, 1910 Wood, J H ‘Bagehot’s lender of last resort’, Independent Review, 7, 343–51, 2003 Woodward, S ‘Limited liability in the theory of the firm’, Journal of Institutional and Theoretical Economics, 141, 601–11, 1985 Xiao, Y ‘French banks amid the global financial crisis’, IMF Working Paper WP/09/201, 2009 Ziegler, P The Sixth Great Power: Barings 1762–1929, London: Collins, 1988 Index Abbey National, 54, 167 Aberdeen Town and Country Bank, 38 Acheson et al index, 57 Admati, Anat, 204 Agricultural and Commercial Bank of Ireland, 38, 71–2, 112, 147 Alliance and Leicester Bank, 54, 96, 98 Anglo-South American Bank Ltd., 161–2 annuity markets, 213–14 Argentina, inflation in 1889, 155 Asian financial crisis of 1997, 18 Asset Protection Scheme, 168 assets fall in values of, 21 illiquid, 17, 20 liquid, 182 price bubbles, 22, 24 auditors, 25 Australian banks collapse of, 52 unlimited liability in, 137 Bagehot, Walter, 120, 121, 140 on theory of lender of last resort, 140–4 bailouts, 154–66 See also bank failures Anglo-South American Bank Ltd., 161–2 Banco Italo-Britannica, 161 Bank of Credit and Commerce International, 165 Cox and Co., 160 Johnson Matthey Bankers, 164 Lifeboat operation, 163–4 Messrs Baring Brothers and Co., 154–7 National Mortgage Bank, 165 Williams Deacon’s Bank, 160–1 Banco Italo-Britannica, 161 Bank Charter Act (1844), 39, 73, 75, 76, 81, 147–8 bank failures See also bailouts annual number, 1792–1930, 52 in banking crisis of 244 1825–6, 70 1836–7, 119 1847, 74–5 1857–8, 76–9 1866–7, 82–4 1878–9, 84–8 2007–8, 98–100 banking instability and, 50–1 cost of credit intermediation and, 17 English banks, 1792–86, 106 rate of, 51–3, 54 Scottish banks, 1792–1826, 106 Scottish provincial banks, 1747–1864, 105 shareholders’ liability in, 6–7 unlimited liability and, 118–19 bank mergers, 42–6 in 1918, 43 Bank of England’s approval in, 184 regulation of, 44–6 Bank of Amsterdam, 213 Bank of California, 49 Bank of Credit and Commerce International (BCCI), 54, 165 Bank of England balance sheets in 1824–28, 146 in 222-year period, 169–70 bank rate in crisis of 1857–8, 76 banking-supervision problem in 1974, 190–1 capital-to-deposits ratio requirements, 134–5 chartering privileges of, 11–12 credit policy, 180 in crisis of 1825–6, 67–70 in crisis of 1836–7, 71 in crisis of 1847, 73–4, 75 discounted bills and notes in crisis of 1825–26, 67–70, 145 establishment of, 36 extension of regulatory oversight, 190 Index industry leadership and nationalisation threat, 175 influence on banking structure during interwar years, 177 leadership and guidance of the banking system, 174–5 as lender of last resort, 144–54 Lifeboat operation in 1974 crisis, 92, 163–4 liquidity ratios required by, 182–3 loans to Northern Rock, monetary control, 189–90 monetary-policy decisions, 218–19 monopoly of note issuance, 213 nationalisation of, 185–6 notes in circulation and securities and bullion held, 1821–26, 68 opposition to limited liability, 214 protosupervisory role of, 176–7, 202 quarterly submission of statistical returns to, 191 sanctions, 185 single reserve system and, 141 special deposits, 183, 189 supervisory oversight and philosophy, 10, 191–2, 193–4 support for Western Bank in 1847, 77 supports and loans to secondary banks, 53 tools of financial repression, 182–3 Bank of England Privileges Act (1833), 38 Bank of Ireland, 37, 71, 147 Bank of Ireland Restriction Act (1821), 107 Bank of Liverpool and Martin’s, 178 Bank of London, 83 Bank of London and South American, 162 Bank of Scotland, 2, 37, 48, 49, 55, 131 bank rate, 168 and crisis of 1866–7, 79 Bank Recapitalisation Fund, 167 bank runs, 19–21 causes of, 20 contagious nature of, 21 crisis of 1825–6, 70 prevention of, 20–1 bank stocks banking instability and, 51, 55–61 after City of Glasgow Bank failure, 122 fall in values of in 1974 crisis, 59 in 2007–8 crisis, 59–60 in post-1914 era, 58–9 Banker’s Magazine index, 57 banking 245 economic growth and, 16 evolution of modern banking, 19 government controls, incentive problem in, political economy of, 211–20 Banking (Special Provisions) Act of 2008, 166, 167 Banking Act of 1935, 138 Banking Act of 1979, 192–3 Banking Act of 1987, 194–5 Banking and Money Market Supervision, 191 Banking Copartnership Act (1826), 36 Banking Copartnership Regulation Act (1825), 37 banking crises, 7–8, 66–101 1825–6 crisis, 8, 67–71 lender of last resort, 144–7 poorly capitalised banks and, 212 reforms after, 213–14 small poorly capitalized banks as cause of, 11 1836–7 crisis, 71–2 lender of last resort, 147 1847 crisis, 72–5 lender of last resort, 148–9 1857–8 crisis, 75–9 lender of last resort, 149–50 1866–7 crisis, 79–84 bank failures in, 82–4 joint-stock banks in, 82–3 lender of last resort, 150–1 1878–9 crisis, 84–8 bank failures in, 84–8 joint-stock banks in, 86 lender of last resort, 151 in 1914–2006 period, 53 1974 crisis, 88–93 money markets in, 89 secondary banking in, 92 bailouts and reorganisations, 154–66 costs of, 18–19 credit crunch and, 17 definitions of, 49–51 effect on money supply, 16 lender of last resort, 140–54 banking instability, 15–34 in 1830–2010, 58 bank failures and, 50–1 banking practices as causes of, 21–2 causes of, 19 costs of solving the crisis, 18–19 economic effects, 61–5 effects of, 16–19 government policies and, 22 246 Index banking instability (cont.) political instability, 18 risk shifting and, 23–8 sovereign-debt crises and, 18 stock prices and, 51 banking stability, 102–3 British banking system, 49–61 death of unlimited-liability banking and, 120–3 depositors and, 205 extended liability and, 205–11 fall in bank capital and, 134–7 importance of, 3–4 lender of last resort and, 152–3 limited-liability banking and, 123–33 partnership banks and, 103–8 political economy and, 211–20 prudential regulation and, 205–11 restoring, 204–20 risk shifting and, 23–8, 204–5 unlimited-liability joint-stock banking and, 108–20 banknotes, 19 bankruptcies, owners’ liabilities in, 30 banks See also British banking industry brand-name capital, 26–7 capital, 27 capital adequacy, 194 capital-to-deposits ratio, 134–5 free-banking models, 26 joint-stock See joint-stock banks monitoring by depositors, 25–6 partnership, 36, 103–8 private, 27, 28–9 public, 27, 29–30 recognised banks, 192 Scottish See Scottish banking industry secondary See secondary banking Barclays, 44, 46, 47, 59–60, 161 Baring, Edward, 155 Baring, Francis, 141, 155 Barings Brothers and Co bailout in 1890, 61, 154–7 bailout of, 154–7 Bank of England’s guarantee fund for, 156 collapse in 1995, 54, 165–6 financial position, 155–6 government’s support for, 157 investment in Argentina and Uruguay, 154 liquidation of, 156 request for Bank of England’s assistance, 155 Barings Brothers and Co Ltd., 156 Barned’s Banking Company Ltd., 82 Basel Accords, 196–201 Basel I achievements of, 196–7 credit risk and, 197 criticism by international banks, 198 risk-weighting methodology, 197 securitisation, 197 Basel II, 198 Basel III, 206 capital requirements, 201 failure in capital regulation, 198–9 flaws, 201 global banking and, 203 regulatory arbitrage and, 198–9 risk measurement and, 199 shareholders and, 200 subordinated debt, 201 Basel Committee on Banking Supervision (BCBS), 195, 206 Belfast Bank, 44 Belfast Newsletter, 55 Belgium, banking crisis in 2007–8, 100 Bernanke, Ben, 17 Big Five banks, 177 Big Six banks, 178 Birkbeck, 157, 159 Birmingham Banking Company Ltd., 83 Black Friday (1866), 81 Blunden, George, 191 Bradford and Bingley, 2, 54, 96, 98, 167 Bradford Banking Company, 114 shareholders’ wealth, 113 branch networks, 40–1 brand-name capital, 26–7 Bretton Woods regime, 218 British banking industry, 35–65 See also Scottish banking industry in 1931, 47 in 2007–8 crisis, 1–2 bank-failure rates, 1792–1826, 106 Bank of England’s leadership and guidance of, 174–5 Bank of England’s monetary policies and, 218–19 banks in return series, 1830–2007, 56 branch networks, 40–1 capital, 1874, 126 capital, 1900–58, 129 capital-to-deposits ratio, 136 cartels, 175 cash and liquidity ratios, 179 competition and credit control, 189–90 competition for deposits, 187 competitive pressures, 48 Index development of, 35–49 director vetting of share transfers and ownership limits, 110–11 distribution of deposits, assets and employees, 2006, 50 earnings and lobbying power, 217 failure rate, 51–3 foreign extensions, 178–9 genesis of informal control, 174–80 global market, 48–9 government bailout, 54–5 government debt, 181–2 government directives, 183–4 growth outside of clearing-bank system, 187 holdings of long-term government securities, 180 joint-stock banks, 38–9 limited-liability banks, 124 liquidity ratios, 182–3 mergers, 42–6 national banks, 1900–1930, 45 nationalisation of, 175 partnership banks, 104–6 phase out of double liability in, 138 profits in 1950s, 185 prudential regulation, 192–5 regulatory capital, 200 removal of extended shareholder liability, socio-occupational status of shareholders, 115–17 special deposits, 189 stability of, 4, 49–61, 201–3 threat of nationalisation, 185–6 top five banks, 1931, 46 Treasury’s cash injection in 2007–11, 168 British Linen Bank, 37, 44 British Overseas Bank Ltd., 162 Brown, Gordon, 218 bubbles, 22 building societies, 48, 187 Building Societies Act (1986), 48 Caledonian Banking Company, 86 callable capital, 127–8, 209 Calomiris, Charles, 17 Canada, 137 Canadian banking industry, phase out of double liability in, 138 capital in 1900–58, 129 adequacy of, 194, 195–201 capital-to-deposits ratio, 134–5 247 common-equity capital, 206 contingent, 102 countercyclical capital buffer, 206 of English limited and unlimited banks, 1874, 126 extended liability and, 208 fall in, 134–7 mitigating risk shifting with, 27 regulatory capital, 200, 201 risk-asset ratio, 194, 197–8 shareholder, 128–32 substitutes for, 137 Tier 1, 196 Tier 2, 196 capital-to-deposits ratio, 9, 16, 129–31, 133 cartels, 175, 181, 188 cash ratio, 182 cash reserves, 180 cedulas, 154 central banking, ceteris paribus, 28 Chancellor of the Exchequer, 1, 76, 87, 177, 185 Charing Cross Bank, 157, 159 Chesterfield and North Derbyshire Bank, 87 City of Glasgow Bank, 9, 41, 76, 84–6, 120–3, 151, 214 Clay, William, 36, 120, 121, 214 clearing banks capital position, 1958, 130 cash and liquidity ratios, 189 competition from bank cartels, 89, 188 compliance with Bank of England’s requests, 188 market share, 1962–70, 187 published capital and reserves in 1958–9, 135 Clydesdale Bank, 44, 48, 123 collateral, lender of last resort, 143 collateralised debt obligations (CDOs), 95–6 Colwyn, Lord, 44–6 Colwyn Committee on Bank Amalgamations, 131, 177 Commercial Bank of Manchester Ltd., 87 Commercial Bank of Scotland, 38 commercial banks economic functions of, 5–6 failure rate, 53 loans to secondary banks, 53 Committee of London Clearing Bankers, 176, 182 248 Index Committee of Secrecy on the Bank of England Charter, 68, 69 Committee of Treasury, 162 Community Reinvestment Act, 215 Companies Act (1862), 80, 124, 127 Companies Act (1879), 41, 123, 126, 214 Companies Act (1967), 89 Competition and Credit Control, 89, 189–90 Consolidated Bank Ltd., 83 consumer credit institutions, 187 contingent capital, 102 contingent liability, 18 cost of credit intermediation (CCI), 17–18 costs, of banking crises, 18, 19–23 countercyclical capital buffer, 206 country banks, 69 failure rate, 105 note circulation, 1821–26, 69 Course of the Exchange, 55 Cox, Hubert, 160 Cox and Co., 160 credit default swaps, 95 credit expansion, 215 Credit Guarantee Fund, 167 credit intermediation, disruption of, 17 credit-rating agencies, 25 credit risk, 197 double liability, 102, 137–8, 207 Dowd, Kevin, 22 Darling, Alastair, Dead Weight Annuity, 67 deposit insurance, 22 Deposit Protection Scheme, 193 depositors, 17 banking stability and, 205 monitoring of banks by, 25–6 100 per cent reserves, 19, 25 rationality of, 23–4 deposits, bank run, 19 building societies, 48 competition for, 187 distribution of, 1962 and 1970, 187 distribution of, 2006, 50 guarantee for, 193 limited-liability banking, 125–6 100 per cent reserve for, 19 share of top five largest banks, 1900–15, 44 deposit-taking institutions, licensed, 192–3 directives, 183–4, 187–8 Discount Office, 190 discount rate, in crisis of 1847, 73–4 discount window, 142 District Bank, 46, 184 Fannie Mae, 95–6, 215 Federal Housing Administration, 215 Fforde, John, 176, 188 finance companies, 80–1, 88–9 Finance Houses Association, 188 financial markets, economic growth and, 16 Financial News, 160 financial repression, 181–6 banking stability and, 207 consequences of, 187 end of, 186–92 global banking and, 202–3 Financial Services Authority (FSA), 166, 197–8, 218 Financial Services Compensation Scheme (FSCS), 167 Financial Times All-Share Index, 57 Finney, Samuel, 82 First Report from the Select Committee on Nationalised Industries, 184 Fisher, James, 25 foreign banks, 178–9, 187 fractional-reserve banking, 19, 22, 24 Franco-Dutch War, 213 Freddie Mac, 95–6, 215 economic historians, economic regulation, 181–6 economic theory of regulation, 212 employees, 50 England and South Wales District Bank, 86–7 English Banking Copartnership Act (1826), 109, 112 English Joint Stock Bank Ltd., 82–3 Equitable Bank, 178 European Economic Community, 192 European Union, banking directive, 190 Exchange Control Act (1947), 185 extended liability, 138 See also limited liability banking; unlimited-liability banking bank capital and, 208 banking stability and, 205–11 callable capital and, 209 conservative bank lending and, 209–10 economic arguments against, 208–11 inflation and, 209 institutional investors and, 209 reintroduction of, 208–11 shareholder numbers and, 208 Index free banking, 26 French banking industry banking crisis in 2007–8, 100 unlimited liability in, 137 Friedman, Milton, 16, 25 G-10 economies, 195 Gayer, Arthur D., 140 German banking industry banking crisis in 2007–8, 100 unlimited liability in, 137 global banking, 48–9 financial repression and, 202–3 gold, discovery in California, 75 Gold Standard, 218 Goodenough, F C., 136 Goodhart, Charles, 27, 174 Goschen, G J., 155 government bonds, 213–14 government directives, 183–4 government policies, 212 and banking instability, 22 government securities, 180 Great Crash of 2007–8, 7, 54–5, 93–100 in 2007–8, bank failures in, 98–100 bank-stock-price depreciation and, 96 bankruptcies in, 64–5 economic effects, 64–5 economists’ failure to predict, 2–3 GDP in, 64–5, 217 inequality and, 215–16 low interest rates and, 93 past financial crises and, policy measures during, 170 political economy, 215–16 political roots of, 11–12 reasons for, 10 securitisation and, 95 Great Depression, 10–11, 16, 17, 84 Great Reform Act (1832), 213 gross domestic product (GDP) banking crises and in 1825–6, 62, 67 in 1836–7, 62–3 in 1847, 63, 72 in 1857–8, 63 in 1866–7, 63, 79 in 1878–9, 63–4, 84 in 1974, 64 in 2007–8, 64–5, 217 before, during and after crises, 1830–2010, 62 costs of banking crises and, 18–19 net public-sector debt and, 168 public-debt-to-GDP ratio, 181 249 Grossman, Richard, 49, 138 Grossman index, 57 Grote, George, 146 guarantee fund Baring Brothers and Co.’s bailout, 156 Yorkshire Penny Bank’s bailout, 158–9 Haldane, Andrew, 209 Halifax, 2, 49 Halifax Equitable Bank, 177 Hambros, 155 Hampshire Banking Company, shareholders’ wealth, 113 Hankey, Thompson, 80, 142 Harman, Jeremiah, 144 HBOS, 2, 49, 54, 96, 98, 99, 199, 200 Headlem, Thomas, 120 Hellwig, Martin, 204 Herstatt, 163 Hire-purchase companies, 187 Holden, Edward, 136, 157 Holland, 137 household debt, 93 interest rates and, 2000–10, 94 housing bubble, 215–16 housing market, 95 in 2000–10, 96 credit expansion and, 215–16 quarterly house-price inflation, 91 HSBC, 49, 59–60 illiquid assets, 17 bank run and, 20 income equality, 216–17 Independent Commission on Banking, 206 Indonesia, 18 inflation, 209 interest rates crisis of 2007–8 and, 93 household debt and, 2000–10, 94 investment banks, 51 Investor’s Monthly Manual, 55 Ireland, credit expansion in, 100 Irish Banking Copartnership Regulation Act (1825), 109, 112 Irish banking industry, 37 joint-stock banks, 41–2 private banks, 37 Irish Currency Report (1804), 37 J Barned and Co., 82 Japanese banking industry growth in 1980s, 195 unlimited liability in, 137 250 Index Johnson, Harry, 182 Johnson Matthey Bankers, 53, 61, 164, 194 Johnson Matthey plc, 53 Joint Stock Bank Act of 1844, 39 Joint Stock Bank Companies Act (1857), 124 Joint Stock Banks (Scotland and Ireland) Act of 1846, 39 Joint Stock Companies Act (1856), 41, 123 Joint Stock Discount Company, collapse of, 81 joint-stock banks, 38–9 See also British banking industry in 1878–9 crisis, 86 branches and shareholders, 1844–99, 40 in crisis of 1825–6, 70 in crisis of 1857–8, 76 in crisis of 1866–7, 82–3 failure rate, 52–3 in Ireland, 37, 41–2 legislation, 39 limited liability, 41 in Scotland, 38, 41–2 share prices, 55 unlimited liability, 108–20 Joplin, Thomas, 107, 141 Kindleburger, Charles, 22 Klein, Benjamin, 26 KPMG, 199 Labour Government, 11 Laeven, Luc, 18, 19–23 landowners, 213 Latin American loans, speculation on, 70 Lazards, 162 Leeson, Nick, 54, 165 Lehman Brothers, 2, 95–6 lender of last resort (LLR) Bank Charter Act (1844), 147–8 Bank of England as, 144–54 in banking crisis of 1825–6, 144–7 1836–7, 147 1847, 148–9 1857–8, 149–50 1866–7, 150–1 1878–9, 151 banking stability and, 152–3 collateral, 143 Henry Thornton on, 140–4 to institutions with liquidity problems, 142 open market versus discount window, 142 penalty rate, 143 single reserve system and, 141 Walter Bagehot on, 140–4 LIBOR, 95–6 licensed deposit takers, 192 Lidderdale, William, 155 Lifeboat operation, 92, 163–4 Limited Liability Act, 41, 123 Limited-liability banking, 28, 123–33 See also extended liability; unlimited-liability banking bank capital, 1874, 126 capital-to-deposits ratio, 129–31, 133 English banks, 124 joint-stock banks, 41 paid-up capital, 133 political economy, 214 reserve liability, 126–8 security of deposits in, 125–6 shareholder capital, 128–32 shareholder wealth and, 127 uncalled capital, 132 Lindert, Peter, 114 liquid assets, 182 liquidity bank run and, 20 ratios, 179, 182–3, 206 Liverpool, Lord, 108 Liverpool Banking Company, 75 Liverpool Borough Bank, 76, 77, 148 Liverpool Royal Bank, 84 Lloyd, Howard, 84 Lloyds, 44, 47, 48, 132, 151, 176–7, 184 Lloyds Banking Group, 167–8 Lloyds-TSB, 2, 54, 96, 100 loan portfolios, opacity of, 23 Lombard Street, 152 London and County Joint Stock Bank, 41, 42 London and County Securities, 92 London City and Midland Bank, 157 losses, in banking crises, 18, 19–23 M3 monetary aggregate, 189 M4 lending, 89 Macmillan Committee, 180 Manchester and County Bank, 46 Manchester Guardian, The, 87 market risk, 197 marketable securities, 20 Martin’s Bank, 47, 132, 184 Mason, Joseph, 17 McCulloch, J R., 107 Index merchant banks, 51 mergers, 42–6 in 1918, 43 Bank of England’s approval in, 184 regulation of, 44–6 Metropolitan Bank, 87 Midland Bank, 44, 46, 49, 132, 161, 178 Miller, Merton, 16, 25 Minsky, Hyman, 21–2 Modigliani, Franco, 16 monetary control, 189–90 monetary policy, 181 Monetary Policy Committee, 169 monetary reserve, 141 money markets, 51 in crisis of 1847, 73–4 in crisis of 1866–7, 80 in crisis of 1974, 89 money multiplier, 16 money supply, 3–4 contraction in, 16 Money Trust, 44 monitoring of banks, 25–6 Monopoly (game), mortgage-backed securities (MBS), 95–6 mortgages effect of low interest rates, 93 subprime, 95–6 UK mortgage market, 2000–9, 94 Mozley, Charles, 82 Mozley, Lewin Barned, 82 Munster Bank, 50 National Bank, 38 National Bank of Scotland, 44 national banks, in 1900–30, 45 National Board for Prices and Incomes, 46, 188 National Monetary Commission, 127 National Mortgage Bank, 165 National Provincial Bank of England, 41, 46, 132, 161, 177, 184 National Westminster Bank, 46 nationalisation, 175, 185–6 Neave, Sheffield, 149 net public-sector debt effect of financial interventions on, 170 as proportion of GDP, 168 Netherlands, banking crisis in 2007–8, 100 Newcastle, Shields and Sunderland Union Joint Stock Bank, 74 N M Rothschilds, 154, 156 Norman, George W., 68, 178 Norman, Montagu, 10, 159, 175–9, 183 251 North of England Joint Stock Banking Company, 74 North of Scotland Bank, 44 Northcote, Stafford, 87 Northern and Central Bank of England, 38, 72, 147 Northern Bank, 46 Northern Rock, 1, 54, 96, 98–9, 166–7, 198 Northern Rock (Asset Management) plc, 167 Northern Whig, 55 Northumberland and Durham District Bank, 76, 78, 148 OSIRIS database, 55 Overend, Gurney and Co., 80–2, 125, 150 paid-up capital, 133 Parliamentary Commission on Banking Standards, 217 partnership banks, 36, 103–8 English, 104–6 failure rate, 105, 106–7 numbers of partners, 104–5 Scottish, 103–4, 106–7 Peel, Robert, 108 Peel’s Bank Charter Act (1844), pension funds, 209 Pole, Thornton and Company, 70 political economy, 211–20 bank earnings and lobbying power, 217 economic theory of regulation, 212 global banking crisis, 219 government policy towards banks, 212 Great Crash of 2007–8, 215–16 income inequality, 216–17 landowners, 213 limited-liability banking, 214 post-1825 banking reforms, 213–14 war and postwar economic policy, 215 war finance, 213 political elites, 213 political instability, 18 Ponzi schemes, 21–2 Preston Banking Company, 83–4 private banks, 28–9 failure rate, 53 Ireland, 37 private companies, 27 profits, in financial-repression era, 185 Protection of Depositors Act (1979), 192–3 prudential regulation, 192–5, 205 public debt, 181 252 Index public-debt-to-GDP ratio, 181, 186 PwC, 199 qualitative directives, 184 quantitative directives, 183 Rae, George, 120, 121–2 railway companies in crisis of 1857–8, 76 discount rate’s effect on stocks, 73 speculation in 1834–6, 71 speculation in 1844–5, 73 Railway Mania (1844–5), 73 Raisman, Jeremy, 184 recapitalisation, 206 recognised banks, 192 regulation Banking Act of 1987, 194–5 economic theory of, 212 financial repression and directives, 181–6 global perspective on, 201–3 informal control in 1914–39, 174–80 prudential, 192–5 risk shifting and, 32 Regulation Q, 202 regulatory capital, 200 Reinhart, Carmen, 49 reorganisations, 154–66 reserve liability, 102, 126–8 reserves fractional, 19 100 per cent reserve for deposits, 19, 24–5 Resumption of Cash Payments Act of 1819, 67 retail banking, 206–7 ring fencing, 206–7 risk measurement, Basel approach and, 199 risk shifting, 204–5 banking instability and, 23–8 banking monitoring as solution to, 25–6 brand-name capital as solution to, 26–7 capital’s role in mitigating, 27 rational depositors and, 23–4 regulation, 28–32 shareholder liability and, 28–32 risk weighting, 197 risk-asset ratio, 194, 197–8 Robertson, Laurence, 63 Rogoff, Kenneth, 49 Rostow, W W., 140–4 Rothbard, Murray, 140 Rothschild, N M., 145 Royal Bank of Liverpool, 74, 84 Royal Bank of Scotland, 2, 37, 48 assets in 2006, 96 capital injections from government, 54 government’s acquisition of 57.9 percent stake in, 167–8 losses in 2008, 99–100 National Westminster Bank’s takeover by, 49 Williams Deacon’s Bank’s takeover by, 160, 178 Salisbury, Lord, 155 Santander, 54, 96 Savile, Henry, 102 Schwartz, Anna Jacobson, 16, 51, 140–4 Scotsman, The, 55, 121 Scottish banking industry, 37 See also British banking industry Bank-failure rates, 1792–1826, 106 capital-to-deposits ratio, 136 four top banks, 1972, 48 joint-stock banks, 38, 41–2 partnership banks, 103–4, 106–7 size and failures of provincial banks, 1747–1864, 105 socio-occupational status of shareholders, 115–17 top banks, 1950s, 46 secondary banking, 89–92 See also banks in crisis of 1974, 92 lending for property development, 89–91 lending market share, 187 profile and crisis experience, 90 securitisation, 95, 197 Select Committee on Nationalised Industries, 163 Select Committee on the Bank Acts, 75, 149 Selgin, George, 22 shareholders, 6–7 bank failures and, 6–7 extended liability and, 208 limited-liability banking, 127 socio-occupational status of, 115–17 unlimited liability of, 8, 28–32 wealth of, 111–14 Sheffield and Hallamshire Banking Company, 114 shareholders’ wealth, 113 Sheffield and Rotherham Bank, 111 Simon, John, 183 Slater Walker Securities, 163 Smith, W H., 155–6 Index Snowden, Philip, 160 South Eastern Banking Company Ltd., 82 sovereign debt, 18 Spain, credit expansion in, 100 special deposits, 183, 189 Special Liquidity Scheme, 167 specie, 19 speculation, asset-price bubbles, 22 statistical returns, quarterly submissions to Bank of England, 191 stock prices banking instability and, 51, 55–61 joint-stock banks, 55 returns, 55–61, 122 returns, 1830–2010, 56 Stronach, Robert, 85 subordinated debt, 201 subprime mortgages, 95–6 Supplementary Special Deposit Scheme, 189 Sweden, 137 Sykes, Joseph, 132 taxpayer bailouts, 22 Thomson Reuters Datastream, 55 Thornton, Henry, on theory of lender of last resort, 140–4 Tier capital, 196, 200, 206 Tier capital, 196 Times, The, 55 Tipperary Bank, 50 Tobin, James, 25 Tooke, Thomas, 68, 147 Treasury, 9–10 Bradford and Bingley’s bailout, 167 cash injection to UK banks, 2007–11, 168 contingent liabilities in 2007–11, 169 nationalisation of Northern Rock, 166 total support to UK banking system in 2007–11, 168 Treasury bills, 180 Treasury Committee on Bank Amalgamations, 44–6 trigger ratio, 197–8 Trustee Savings Bank, 48 trustee savings banks, 187 Ulster Bank, 44 Ulster Banking Company, 111, 112, 113, 114 253 uncalled capital, 102, 127, 132 Union Bank of Manchester, 46 Union Bank of Scotland, 118, 123 United Dominions Trust, 163 United States banking industry branch banking restrictions, 138 crisis in 2007–8, 100 double-liability rules, 137–8 phase out of double liability in, 138 politics and, 211 suspension of payments in 1857, 76 unlimited-liability banking, 8, 28–32, 108–20 See also extended liability; limited liability banking bank capital, 1874, 126 bank failures and, 1836–78, 119 banking stability and, 102 failure of City of Glasgow Bank and, 120–3 failures of, 118–19 global perspective on, 137 joint and several, 28–9, 31–2 joint-stock banking, 108–20 opposition to, 120 political economy, 214 shareholder wealth and, 111–14 socio-occupational makeup of shareholders, 114–17 sudden death of, 120–3 Valencia, Fabian, 18, 19–23 value-at-risk (VaR) model, 197, 199 war finance, 213 wealth of bank owners, 28–9 of shareholders, 111–14 Western Bank of Scotland, 76, 77–8, 120, 148 Western District Bank Ltd., 87 Westminster Bank, 44, 46, 49, 132, 161, 184 William III, 213 Williams Deacon’s Bank, 132, 160–1, 178 Woods, Williams, 74 Yorkshire Penny Bank, 158 bailout of, 157–9 Bank of England’s guarantee fund for, 158–9 subscribers and guarantors of, 158 ... Banking in Crisis Can the lessons of the past help us to prevent another banking collapse in the future? This is the first book to tell the story of the rise and fall of British banking stability... British banking system since 1800 and the effect of banking instability on the real economy The development of the British banking system At the time of the Great Crash of 2007–8, Britain’s banking. .. and banking instability 23 of banking stability in Britain lends little in the way of support to this view of the causes of banking instability Risk shifting and banking instability The vulnerabilities