BORING BANKS: Lessons from Britain’s uncompetitive but stable banking system from 1945 to the early 1970s
- 30 Mar 2016
Competition in banking has not always been seen as an unalloyed good. Research by Linda Arch, to be presented at the Economic History Society’s 2016 annual conference in Cambridge, explores the highly ambivalent attitude towards competition in banking in the post-war period. She shows that although the ‘Big Five’ retail banks operated as a cartel, it was not obvious that customers were harmed, there was a high degree of compliance with regulation and this was a period of stability in banking.
Some moderation of competition was seen as an acceptable price to pay for stability and compliance in banking, the study concludes. Bank directors and shareholders understood that a bank was a social institution, balancing a wide range of interests. They were not yet in thrall to the rather different philosophy that a company’s most important obligation was to maximise its shareholders’ wealth.
The study notes that we take it for granted these days that competition in banking is an unalloyed good. Indeed, the main regulators of financial services in the UK (the Financial Conduct Authority and the Prudential Regulation Authority) have the promotion of competition as organisational goals.
Yet competition’s place at the centre stage of the banking system is a rather contemporary notion. In the decades after the Second World War, a highly ambivalent attitude towards competition in banking held sway. This research in the archives of the Committee of London Clearing Bankers (at the London Metropolitan Archives), the Bank of England and Lloyds Banking Group helps to shed light on why this might be so.
Up until the early 1970s, the ‘Big Five’ retail banks and a handful of smaller banks often acted as a group. They were a cartel. Interest rates on current and deposit accounts were set by the chairs of the 11 clearing banks at their monthly meetings of the Committee of London Clearing Bankers (CLCB). Opening hours were also agreed through the committee.
What seems extraordinary to us now – when eliminating cartels is seen as a major objective of competition policy – is that the Bank of England (the regulator) did not merely turn a blind eye to the existence of the cartel but endorsed it. Why?
Well, first, it was not obvious that collective pricing harmed consumers. In May 1967, an 11-month investigation into bank charges by the National Board for Prices and Incomes concluded that ‘it does not seem that the actual level of charges could be described as unreasonable.’ The Bank of England acknowledged that the cartel kept lending rates to vital industries such as shipbuilding lower than they would otherwise be.
Collective action by the Big Five – Barclays, Lloyds, Midland, National Provincial and Westminster – might also stabilise the banking system. Between 1918 and 1968, there was a ‘gentleman’s agreement’ among the Big Five that they would not merge with each other. This prevented the emergence of a gigantic ‘too big to fail’ bank. Self-interest also played its part. When the government needed to reduce the amount of credit in the economy, it had merely to issue guidance to that effect to the CLCB.
By the early 1970s, these arguments had become less convincing. In 1970, the newly elected Conservative government under Ted Heath was determined to inject competition into all areas of British industry. Banking was no exception. Its policy of ‘Competition and Credit Control’ in 1971 – a ‘revolution’ in banking as The Economist put it – marked the beginning of the end of the cartel.
Today’s regulators and policy-makers are arguably wrestling with far more complex issues. But post-war banking may still provide an intriguing case study. The period from 1945 to the early 1970s was after all a time of stability in banking. There were no clearing bank failures. The most significant banking crisis, which began in late 1973, was a crisis of the ‘secondary’ banks, not the clearing banks. It was resolved by the Bank of England with the support of the clearing banks.
There was also a high degree of compliance with regulation. Today, news that a bank has been fined for not complying with regulation has become commonplace.
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