Cashfloat is a responsible payday loan direct lender in the UK. We work hard to keep UK consumers well-educated so that they can make informed decisions. In this guide, we look at how the history of banking in the UK affects the way we manage money today and the rippling effects of UK banking deregulation.
Changes to the Banks in the 1980’s
The deregulation of the UK banking system system is one of the most momentous and contentious events in the history of banking. It was introduced by the Conservative government of the day in the mid 1980s. There was a bid to make financial services in the UK more competitive with foreign banking.
Even though London was already a financial hub, it was falling behind the US. It was mooted that the reason behind this was over regulation and the dominance of what were called ‘old boy networks’. In other words, success in finance was deemed to be achieved by who you knew and not what you knew.
The Free Market Ideal
The regulations that operated in banking before deregulation policies were put into force were from the government. In order to raise the level of competitiveness, regulations were reduced. This was intended to generate higher productivity and more efficiency. While this was being implemented, the government was also set on a path of privatisation of government-held businesses. For example, the transport system and the telephone company.
The process of UK banking deregulation led to a position where UK banks could have foreign owners. It ended the fixed rate commissions for traders. It was responsible for getting rid of the distinction between brokers and jobbers. People thought that by getting rid of the regulations which held back the banks, London would rise to the top as a financial centre. This is exactly what happened.
Changes Within the Banking System
Once UK banking deregulation had taken place, there was an explosion in the finance industry. Many smaller banks were taken over by large banks. This is one of the ways that the big four UK banks came to be so important and dominant in future years.
Many large corporations moved to Canary Wharf. Another result of UK banking deregulation, was that banks became less cautious about how they invested in the markets. Instead of using their own investments to play the markets, they suddenly had access to savings from High Street retail banks which had been taken over. One example of this is the small bank Martins. It was taken over by Barclays Bank, now one of the big four leading UK banks.
The Financial Services Authority
The FSA was set up to monitor financial services in the UK. So, why did it fail to see the looming financial crisis that appeared in the mid 2000s? The problem lay with the fact that it was never thought that more than one institution would come under pressure at any one time.
The banks that grew after deregulation were so big that any one failure was bound to bring down the rest. This is why the government was forced to provide a bailout when the crisis hit the UK.
Deregulation led to a situation where the risk was spread throughout the whole banking system instead of being concentrated in one bank. The FSA failed to realise this and now this monitoring body has been replaced by the Financial Conduct Authority. So far, they have proved to have had far more success in keeping the UK financial institutions, including payday lenders like us, on the right path.
The Consequences of UK Banking Deregulation
The consequences of UK banking deregulation can be seen all over the world, but nowhere more so than the UK. Deregulation led to policies which pushed for aggressive growth. Although some parts of the change of direction were about modernisation of an outdated banking system, it led to many organisations getting totally out of their depth.
Combining Investment Banking and Retail Banking
Having dismantled the barriers between investment banking and retail banking, deregulation opened the way for building societies to become banks. This then took on the experts in the markets, but some subsequently failed.
The bank HBOS consisted of several building societies and banks that had been merged. In the process, it acquired a huge amount of sub prime debt which was seen as a profitable investment. However, once the US housing market began to drop, the bank found itself in a serious situation. It became one of the flagships of failure for UK banking, and had to be bailed out by the government using taxpayers funds.
The size of the main banks was such that they were deemed to be ‘too big to fail’ and this proved to be the case. Suddenly no one knew who owned what and it almost caused a run on the banks as figures began to be published.
Globalisation of the World Economies
A lot has been written and spoken about globalisation. This is part of the problem that, along with UK banking deregulation, led to the financial problems which occurred in the 2000s. True, the financial industry attracted a lot of capital and deregulation helped to cement the UKs position as a financial capital in the world. However, the resulting decrease in manufacturing and the strength of sterling also led to the UK being in a position where it was at risk of having too many eggs in one financial basket.
Conclusions about UK Banking Deregulation
It would seem that the benefits of deregulation have outweighed the downsides. However, there are arguments that, with hindsight, it could have been managed in a much more measured way. This could have avoided the big bang that appears to have caused so many headaches in the financial markets.
Even the former governor of the Bank of England has conceded that banks grew too quickly. They therefore became too big to fail, thus creating a ticking bomb when world markets came under pressure. It is also true that financial crises are not something new. They have been experienced throughout history, but this one has proved to be somewhat intractable.
