BRITISH BANKING, 1960-85 BRITISH BANKING, 1960-85 John Grady and Martin Weale Palgrave Macmillan ISBN 978-1-349-07537-9 ISBN 978-1-349-07535-5 (eBook) DOI 10.1007/978-1-349-07535-5 ©the Estate of the late John Grady, and Martin Weale, 1986 Softcover reprint of the hardcover 1s t edition 1986 All rights reserved. For information, write: Scholarly & Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010 First published in the United States of America in 1986 ISBN 978-0-312-10041-4 Library of Congress Cataloging-in-Publication Data Grady, John British banking, 1960--85. Bibliography: p. Includes index. 1. Banks and banking-Great Britain-History-20th century 2. Great Britain-Economic conditions- 1948-- I. Wea1e, Martin, 1955- II. Title. HG2988.G68 1986 332.1'0941 85-26238 ISBN 978-0-312-10041-4 Contents ~~~~ ~ ~~~~ x Preface xi Abbreviations xii INTRODUCTION 1 1 AN OVERVIEW OF THE ECONOMY, 1960-85 5 1.1 Movements in Output 5 1.2 Inflation 7 1.3 Money 9 1.4 Interest Rates and Asset Returns 15 1.5 Summary 18 2 RISK AND FINANCIAL INSTITUTIONS 20 2.1 Financial Institutions 22 2.2 The Balance Sheet of a Bank 24 2.3 Illiquidity 25 2.4 Movements in Liquidity 26 2.5 Insolvency 28 2.6 Attitudes to Risk and Uncertainty 30 2.7 Summary 34 3 BANK OF ENGLAND CONTROL AND SUPERVISION 35 3.1 Prudential Regulation pre-1979 36 3.2 The Banking Act, 1979 39 3.3 Regulation of the Credit Base and the Money Stock 44 3.4 Credit Control in the 1960s 44 3.5 Competition and Credit Control 51 3.6 The Supplementary Special Deposits Scheme 58 3.7 Monetary Control in the 1980s 61 3.8 Summary 64 v vi Contents 4 THE TRADITIONAL BANKING SYSTEM 66 4.1 The Clearing Banks 66 4.2 Balance Sheet Structure 67 4.3 Clearing Banks in the 1960s 70 4.4 The Clearing Banks, Competition and Credit Control and after 72 4.5 The Pattern of Lending 75 4.6 The Capital Base of the Clearing Banks 79 4.7 Competition in Retail Banking 79 4.8 The Discount Market 84 4.9 The Balance Sheet of the Discount Houses 87 4.10 The Discount Market and Competition and Credit Control 88 4.11 Interest Rates in the Traditional Markets 91 4.12 Summary 92 5 THE ACCEPTING HOUSES 94 5.1 Background 94 5.2 Resurgence 99 5.3 Acceptance House Banking 105 5.4 The Capital Base of the Accepting Houses 112 5.5 Summary 113 6 THE NEW MONEY MARKETS 114 6.1 The Local Authority Markets 114 6.2 The Interbank Market 118 6.3 Negotiable Certificates of Deposit 121 6.4 The Finance Houses 125 6.5 Interest Rates in the Parallel Markets 127 6.6 The Eurodollar and the Euromarkets 130 6.7 Acceptances 135 6.8 Summary 138 7 THE OTHER BRITISH NON-CLEARING BANKS 139 7.1 Balance Sheet Structure 142 7.2 Clearing Bank Subsidiaries 145 7.3 The Property Boom 147 7.4 The Banking Crisis 149 7.5 Some Non-clearing Banks 155 7.6 Summary 169 Appendix: Foreign and Commonwealth Banks 170 Contents vii 8 INTERNATIONAL PROBLEMS 175 8.1 Banking Instability 175 8.2 The International Debt Crisis 180 8.3 International Liquidity and Solvency 183 8.4 Bank Lending to Developing Countries 185 8.5 Debt Rescheduling 190 8.6 Conclusion 193 9 CONCLUSIONS 195 9.1 The Evolution of the Banking System 195 9.2 Prudential Regulation and the Banking Crisis 197 9.3 The Changing Financial System 201 9.4 Summary 203 Notes and References 207 Glossary 213 Bibliography 217 Index 225 List of Tables 1.1 Sterling deposits with banks in the United Kingdom, 1960-84 1 1.2 Foreign currency deposits with banks in the United Kingdom, 1960--84 2 1.1 Indicators of economic instability, 1960--84 19 2.1 Assets of major financial institutions 23 2.2 Bank sterling assets and liabilities by maturity (February 1985) 23 2.3 A schematic bank balance sheet 24 2.4 The ratio of sterling advances to sterling deposits (end year) 27 3.1 The supplementary special deposits scheme 58 3.2 Issue department of the Bank of England, 1981-4 63 4.1 The retail banks in 1984 67 4.2 Clearing banks' balance sheet (December) 68 4.3 Reserve asset growth under competition and credit control, 1971-3 73 4.4 Reserve asset movement at the end of competition and credit control 75 4.5 London and Scottish clearing bank lending to UK residents 78 4.6 The capital base of the 'big four' banks 80 4.7 Clearing bank long-term debt in 1984 81 4.8 Deposits with clearing banks, building societies and National Girobank 82 4.9 Discount houses and their total assets in 1984-5 84 4.10 Discount market balance sheet (December) 87 4.11 Sterling assets and liabilities of discount houses, 1971-3 88 4.12 Sterling assets and liabilities of discount houses, 1980--1 90 5.1 The accepting houses in 1984-5 95 5.2 Funds managed by accepting houses, 1984 102 5.3 Accepting houses' balance sheet (December) 106 Vlll List of Tables ix 5.4 Accepting houses' advances and outstanding acceptances to UK residents 111 5.5 The capital base of five accepting houses 113 6.1 The new money markets, 1960-84 115 6.2 The ownership of local authority debt 117 6.3 £ deposits and advances, 1960-84 121 6.4 The ownership of sterling CDs 125 6.5 The pattern of finance house liabilities, 1984 127 6.6 Overseas foreign currency deposits with banks in the UK 134 6.7 Bank foreign currency assets and liabilities by maturity (February 1985) 134 6.8 Acceptances outstanding 137 7.1 The five largest other non-clearing banks in 1984-5 139 7.2 Other British banks' balance sheet (December) 140 7.3 Advances to UK residents by British non-clearing banks apart from accepting houses 144 7.4 Deposits with clearing bank groups 147 7.5 Advances to subsidiaries by major clearing banks 147 7.6 Keyser Ullman Holdings Ltd. 157 7.7 First National Finance Corporation pIc 160 7.8 Foreign and consortium banks in Britain 1984-5 171 7.9 The balance sheet of foreign and commonwealth banks (December) 172 8.1 External debt and debt service of the less developed countries 182 8.2 Lending by banks to underdeveloped countries 186 8.3 Lending to Argentina, Brazil and Mexico by clearing bank groups 188 NOTE The sources from which the data are drawn are indicated on each table. In some cases rounding errors mean totals differ slightly from the sum of component parts. List of Figures 1.1 Velocity of circulation of M1 and £M3 11 1.2 Changes in bank lending and £M3 11 3.1 Special deposits from 1960 47 6.1 Local authority and Treasury bill three-month rates relative to minimum lending rate 128 8.1 Yields on UK and Mexican government stock 189 x