The UK: Financial Globalization and Formalization of Banking Supervision

Eiji Hotori,Thibaud Giddey,Mikael Wendschlag

doi:10.1007/978-981-16-6783-1_9

Abstract

AbstractAmong the developed economies, the UK was the latest to formalize banking supervision as we define it in this book. The process began in the mid-1970s following the fringe bank crisis and the simultaneous beginning of international cooperation on banking regulation matters in the Basel Committee on Banking Supervision. The crisis led to the reforms of both the Banking Act and the Bank of England Act in 1979—the Bank of England was assigned its first formal duties and responsibilities for banking supervision, and the commercial banks had to meet bank-specific requirements instead of the general corporate law. However, given the reluctance of the Bank of England to conduct banking supervisory activities as well as the Bank’s behavior to stick with the conventional informal “governor’s eyebrow,” we deem the formalization process ongoing until the reforms of 1987. The Banking Act 1987 clarified the Bank of England’s responsibilities and mandate regarding banking supervision, and the Board of Banking Supervision was established as a permanent formal organization to monitor and council the Bank of England on supervisory matters. The UK is an interesting case where the banking supervision remained informal until quite recently—compared to other countries. The formalization process can be explained by the crisis and the international push for harmonized banking regulation.

Highlights

Scale became an important element for the commercial banks that adopted the strategy of keeping up with the growing companies of industry and trade
The British commercial banks focused on trade finance since investment capital was generated via the THE UK: FINANCIAL GLOBALIZATION ... 127 stock exchange
The reforms from the late 1970s and 1980s enabled the British commercial banks to compete on international markets

Summary

A Brief History of Commercial Banking in the UK

The Bank of England was formed as the first joint-stock bank in history in 1694, and came to dominate commercial banking in the British capital for the following one and a half century. Until the mid-nineteenth century, it was the sole bank operating in the London region, while in other parts of the country small private bankers provided banking services to the merchants, the elites, and the businessmen of the industrializing economy. While the Bank of England was a privately owned, for profit commercial bank, its existence was and remained linked to its services as lender to the British government (Tilly 1989). The private banks, funded by note issuing, mainly offered services of short-term loans to local merchants and businessmen, money exchanges, and settling payments. Several leading bankers, such as the Rothschild, acted as brokers to arrange large loans to governments and participated in market funding on the London Stock Exchange.

HOTORI ET AL

The Long Road to Formal Banking Regulation

Supervisory Department of the Bank of England

Findings

The Banking Supervision of the Bank of England