BANKING IN BRITAIN
Since the 17th century Britain has been known for its prominence in banking. London still remains a major financial centre, and virtually all the world’s leading commercial banks are represented.
Aside from the Bank of England, which was incorporated, early English banks were privately owned rather than stock-issuing firms. Bank failures were not uncommon; so, in the early 19th century, joint-stock banks, with a larger capital base, were encouraged as a means of stabilizing the industry. By 1833 these corporate banks were permitted to accept and transfer deposits in London, although they were prohibited from issuing banknotes, a monopoly prerogative of the Bank of England. Corporate banking flourished after legislation in 1858 approved limited liability for joint-stock companies. The banking system, however, failed to preserve a large number of institutions; at the turn of the 20th century a wave of bank mergers reduced both the number of private and joint-stock banks.
The present structure of British commercial banking was substantially in place by the 1930s, with the Bank of England, then privately owned, at the apex, and 11 London clearing banks ranked below. Two changes have occurred since then: the Bank of England was nationalized in 1946 by the post-war Labour government; and in 1968 a merger among the largest five clearing banks left the industry in the hands of four players: Barclays, Lloyds (now Lloyds TSB Group), Midland (now part of HSBC Holdings), and National Westminster (taken over by the Royal Bank of Scotland in 2000). Financial liberalization in the 1980s resulted in the growth of building societies, which in many ways now carry out similar functions to the traditional clearing banks.
The clearing banks, with their national branch networks, play a critical role in the British banking system. They are the key links in the transfer of business payments through the checking system, as well as the primary source of short-term business finance. Moreover, through their ownership and control over subsidiaries, the big British banks influence other financial markets dealing with consumer and housing finance, corporate finance and investment, factoring, and leasing.
A restructuring in the banking industry took place in the late 1970s. The Banking Act of 1979 formalized the Bank of England’s control over the British banking system, previously supervised on an informal basis. Only institutions approved by the Bank of England as “recognized banks” or “licensed deposit-taking institutions” are permitted to accept deposits from the public. The act also extended Bank of England control over the new financial intermediaries that have flourished since 1960.
Like many central banks, the issue of the Bank of England’s independence in setting interest rates and so influencing inflation and demand-side economics has long been an issue of debate. For a central bank to be able to ensure monetary and financial stability for the nation requires the political bias of government decision-making to be removed. As a result of a series of costly decisions by the British Conservative government in 1992, which saw Britain being forced to withdraw from the Exchange Rate Mechanism of the European Union, greater power was granted to the Bank of England to control inflation. In 1997 a new, Labour government handed operational independence to the Bank of England and an annual remit to set interest rates to ensure inflation does not rise above 2.5 per cent. This is done by the Monetary Policy Committee.
London has become the centre of the Eurodollar market; participants include financial institutions from all over the world. This market, which began in the late 1950s and has since grown dramatically, borrows and lends dollars and other currencies outside the currency’s home country.