GENTLEMEN AND PLAYERS IN GLOBALISING FINANCIAL MARKETS: How bankers’ organisations kept the regulators at bay in the 1970s
- 25 Mar 2015
Why have repeated efforts to improve the resilience of global banking failed? A new study by Catherine Schenk, to be presented at the Economic History Society’s 2015 annual conference, reveals that even in the globalising financial markets of the 1970s, entrenched interests were able to ensure that banks were governed based on norms and standards that had been established a century earlier.
For example, when the Basel Committee was established in 1975, there was considerable resistance to common standards among national regulators and the Chairman resisted the idea of a new ‘early warning system’. Around the same time, the Bank of England preferred to rely on self-regulation by bankers themselves rather than imposing statutory standards and limits. The study finds that the Bank took the guidance provided by the British Bankers Association to its members to the Basel Committee in 1976 as an example of best practice in self-regulation.
How do bankers exercise influence over new rules and supervision? What was the relationship between the British Bankers Association and the Bank of England? Why have bankers been able to rely on regulating themselves rather than being regulated by government? And how have public interests been affected by the private interests of groups of bankers? The new research addresses these questions in the specific context of the 1970s, a period of dramatic change in global financial markets.
Writing in 1973, D.C. Coleman defended the role of ‘gentleman’ among British entrepreneurs with specific reference to the financial sector: ’English merchant banking, with its especial mix of finance and diplomacy, was, until only very recent times, almost a preserve of the older Public Schools; it was also very successful. So were many other financial activities of the City of London.’
But with the expansion of the global financial markets from the 1970s and 1980s, the nature of international banking shifted to include more ‘players’ that threatened this ‘gentlemanly’ code of practice based on reputation and mutual understanding.
This study looks at two bankers’ organisations in the 1970s: the Basel Committee of the Bank for International Settlements, and the British Bankers Association. This was a period of financial innovation and new risks that changed the nature of the global banking system and increased the risks and costs of international banking crises.
It was a time when the rather closed and cosy relationships between bankers and regulators were challenged by new entrants, new business and new customers. In the summer of 1974, there was a rash of banking scandals across Europe and the United States due to fraud and inadequate precaution in the context of volatile foreign exchange markets.
This drew calls for greater supervision of banking activities to protect the public, similar to calls after the global financial crisis of 2008. But there was resistance both at national and international level to interfering in the business of bankers.
The Basel Committee was set up by European and US central banks in 1975 to set standards in international banking across borders and construct an ‘early warning system’. But their efforts to create common minimum standards in the 40 years since then have failed to prevent a series of global banking crises in the 1980s, the 1990s and again in 2008.
Why have the repeated attempts to have common standards to improve the resilience of global banking failed? This study looks at the minutes of the early meetings to show that there was considerable resistance to common standards among national regulators and that the Chairman of the Basle Committee resisted a new early warning system. Instead, the continuation of personal contacts and informal exchange of gossip were used as the working practices of the Committee over its first few years of operation.
Meanwhile, the British Bankers Association (most recently charged in terms of LIBOR) was re-energised in the early 1970s and extended its membership to about 300 banks in London. It was closely linked to the Bank of England (its chairman was a former Governor) and it repeatedly sent out industry guidance that was described as ‘the embodiment of a recommendation of the Bank of England’.
Indeed in the foreign exchange market, the Bank of England preferred to rely on self-regulation by bankers themselves rather than imposing statutory standards and limits. The Bank of England took the Association’s guidance to its members to the Basel Committee in 1976 as an example of best practice in self-regulation by the market.
This study uncovers these early years of globalising international markets and how entrenched interests helped to ensure that they were governed based on norms and standards that had been established a century earlier.
‘Gentlemen and players: regulation and self-regulation in international banking in the 1970s’
University of Glasgow