The UK banking system: structure, regulation and effects of the 2007-09 financial crisis

Although all banking systems exhibit common characteristics, determined by their functions, they differ in structure depending on their nationality, outlined and distinguished by legislation and by the historical evolution of each country. Among the various forms of interaction between the financial sector and other sectors of the economy that require this type of service, it is possible to identify three fundamental cases: 1) the first, in which the financial sector plays a positive role for growth; 2) the second, in which it is essentially neutral or merely permissive, 3) the third, in which the financial system is inadequately restrictive, hindering industrial and commercial development. After this brief but necessary introduction, we will focus on the UK banking system, one of the most important European banking systems, examining its origins and evolution. 1.1 The origins of the UK banking system Since the seventeenth century, Britain has been distinguished by the significance of its banking system, and London still remains one of the major financial centres. As early as the sixteenth century, the increasing development of foreign trade, favoured by the possession of large coal resources and by the strategic geographical position, had, in fact, contributed to the birth of the nation’s financial organization. Although the origins of the UK banking system seem uncertain, it is possible to find a first approach to its creation in the years following the Restoration of 1660, when several large goldsmiths began to play the role of bankers in London. They granted warehouse receipts circulating as paper currency and loans to creditworthy entrepreneurs. The Bank of England was established in 1694 and was one of the first Central Banks to administer, on behalf of the King, the nation’s gold reserves to secure loans with interests in other banks and citizens. Its legal monopoly over joint-stock banks forced “money scriveners”, who were officers and wealthy stockholders, to renounce the issue of paper currency. They nevertheless continued to carry out basic banking functions of deposit, accepting money orders and discounting bills of exchange. The Bank of England did not establish branches and its banknotes (of large denomination) did not circulate outside London. In addition, the Royal Mint was extremely inefficient and the value of gold coins was too high to be used to pay wages or in retail trade, while silver and copper coins were inadequate.1 This shortage of money encouraged private initiative: industrialists, merchants and even Republicans issued paper money and coins which addressed the lack of local money circulation. From these disparate origins derived the institution of “provincial banks”, that is banks which were not controlled by London, whose growth was even faster in the second half of the eighteenth century and whose number rose to 800 in 1810 (Cameron and Neal 2005). In the nineteenth century, the process of industrialization was accompanied by a proliferation of banks and other financial institutions necessary to provide the financial services required by an increasingly complex economic system. In the early nineteenth century the Bank of England – in fact the Bank of London – still exercised its monopoly in the joint-stock banking sector; the numerous small “rural banks” of the provinces were obliged to constitute as partnerships, and this 1 Around 1790, John Wilkinson, an industrialist who owned a railway line, coined symbolic money both to meet the local circulation and for advertising.