3 - The evolution of British banking structure and stability since 1800

Summary

It’s awful – why did nobody see it coming?

Her Majesty Queen Elizabeth II

Introduction

In this chapter, we measure and assess the stability of the British banking system from 1800 to the present, using a combination of bank-failure data and bank-stock prices. The main finding from this analysis is that there have been two major or systemic banking crises in the past two centuries: 1825–6 and 2007–8. In the interim, there were several minor or nonsystemic crises.

However, before we examine the stability of the banking system, we need to understand how the structure of British banking has evolved since 1800, for at least three reasons. First, we need background and context if we are going to examine the stability of the banking system. Second, the structure of the banking system may have a bearing on its stability and vice versa. Third, the two ways that we have to assess banking stability require us to comprehend the basic evolution of UK banking structure. Thus, the following section describes and explains how the UK banking system evolved. The two subsequent sections explore the stability of the 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 system was dominated by a small number of banks that had branches not only throughout the United Kingdom but also subsidiaries around the globe. However, two centuries earlier, the United Kingdom had literally hundreds of banks, all of which had a limited geographical reach. How did this transformation happen? To fully understand the evolution of the UK banking system, we must recognize the fact that it evolved from separate systems in England and Wales, Scotland, and Ireland.