Banking in the United Kingdom

Introduction

History of Banking in Great Britain

Since the 17th century Great Britain has been known for its prominence in banking. London still remains a major financial center, and virtually all the world’s leading commercial banks are represented there.

Aside from the Bank of England, which was incorporated, early English banks were privately owned rather than stock-issuing firms. Bank failures were common; 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.

Legislation in 1858

Corporate banking flourished after legislation in 1858 approved limited liability for joint-stock companies. The banking system, however, failed to preserve the large number of institutions typical of U.S. banking. At the turn of this century, a wave of bank mergers reduced both the number of private and joint-stock banks.

The end of 20th century 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 postwar Labour government; and in 1968 a merger among the largest five clearing banks left the industry, then, in the hands of four (Barclays, Lloyds, Midland, and National Westminster).

Clearing Banks Dominance

The larger clearing banks, with their national branch networks, dominated British banking. They were 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 influenced other financial markets dealing with consumer and housing finance, merchant banking, factoring, and leasing.

The dominance of the clearing banks was challenged later by the rise of “parallel markets,” encompassing financial activities by smaller banking houses, building societies (similar to SLAs in the United States), and other financial concerns, as well as local government authorities. The major banks responded to this competition by offering new services and competitive terms.

Banking Act of 1979

A restructuring in the banking industry took place in the late 1970s. The Banking Act of 1979 formalized Bank of England 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.

London

London has become the center of the Eurodollar market; participants include financial institutions from all over the world. This market, which began in the late 1950s, grew quickly, with an estimated volume, in 1975, of $1 trillion, borrows and lends dollars and other currencies outside the currency’s home country (for example, franc accounts held in any country other than France).

More about Banking

Commercial Banking in the United States

Commercial banks are the most significant of the financial intermediaries. Read more about Commercial Banking in the U.S. here.

Thrift Institutions

Savings and loan associations (SLAs) and savings banks are similar but separate financial institutions. Both were patterned after cooperative movements in Scotland and England. See more about Thrift Institutions here.

European Banking

European banks engage in some activities prohibited to banks in the United States. Commercial banks in Europe tend to be more business oriented. Read more about Banking in Europe here.

Role of Central Banking

The foremost monetary institution in a market economy is the central bank. These are usually government-owned institutions, but even in countries where they are owned by the nation’s banks (such as the United States and Italy), the responsibility of the central bank is to the national interest. Read more about central banking here.

International Banking

In 1978 the U.S. Congress passed the International Banking Act, which imposed constraints on the activities of foreign banks in the United States. Read more about international banking here.

Source: “Banking” Microsoft® Encarta® Online Encyclopedia

Legislation and Bank Rate

One result of the division of the accounts of the bank into two departments is that, if through any circumstance the Bank of England be called on for a larger sum in notes or specie than the notes held in its banking department (technically spoken of as the “Reserve”) amount to, permission has to be obtained from the government to “suspend the Bank Act” in order to allow the demand to be met, whatever the amount of specie in the “issue department” may be. Three times since the passing of the Bank Act—during the crises of 1847, 1857 and 1866—authority has been given for the suspension of that act. On one of these dates only, in 1857, the limits of the act were exceeded; on the other two occasions the fact that the permission had been given stayed the alarm. It should be remembered, whenever the act of 1844 is criticized, that since it came into force there has been no anxiety as to payment in specie of the note circulation; but the division of the specie held into two parts is an arrangement not without disadvantages.

Bank rate

Certainly since the act of 1844 became law, the liability to constant fluctuations in the Bank’s rate of discount—one main characteristic of the English money market—has greatly increased. To charge the responsibility of the increase in the number of those fluctuations on the Bank Act alone would not be justifiable, but the working of the act appears to have an influence in that direction, as the effect of the act is to cut the specie reserve held by the bank into two parts and to cause the smaller of these parts to receive the whole strain of any demands either for notes or for specie. Meanwhile the demands on the English money market are greater and more continuous than those on any other money market in the world. Of late years the changes in the bank rate have been frequent, and the fluctuations even in ordinary years very severe. From the day when the act came into operation in 1844, to the close of the year 1906, there had been more than 400 changes in the rate. The hopes which Sir Robert Peel expressed in 1844, that after the act came into force commercial crises would cease, have not been realized.

Source: Encyclopedia Britannica (1911)

Banking