The Banking Act 1979 was the first statutory banking law in the UK. It marks a fundamental change in the approach to banking regulation and supervision. Despite this, there was little controversy when it was introduced. Most market participants and public officials accepted the need for a law. This was in large part because of the supervisory failures that led up to the secondary banking crisis. Two questions arise with the Banking Act, however: why did it take more than five years to get into law after the fringe crisis, and why did it take the twotier form that it did?

The answer to both questions lies in the political process; that is, the relative influence between the interests of different institutional actors. As events caused different actors to gain or lose influence, they became more or less able to advance their interests in creating a bank law. The Banking Act 1979 reflects the final outcome of this round of contestation. It represents a compromise whereby the government managed to force a statutory banking law onto the Bank of England, “compensated” by legal backing for the Bank of England's authority over banks and the Bank's ability officially to separate “proper” banks from other non-bank financial institutions (called “licensed deposit takers”). Similar to the outcome of the 1946 nationalization of the Bank of England, the Bank formally accepted a subordinated role to the government while insisting on its operational independence.

As a short-term strategy the law favoured the status quo in the Bank's interest, but created longer-term tensions. In the case of the Banking Act 1979, these emerged in 1984 with the “Johnson Matthey Bankers affair”. This “affair” revealed significant shortcomings in the Bank's approach to bank supervision, laying bare a fundamental problem with the two-tier banking system. This would lead to a redrawing of the law in 1987 as an add-on to the City's deregulation in “Big Bang” and to the UK's third banking regime in less than eight years. The JMB crisis also highlighted tensions between the Bank of England and the government which undermined one of its two sources of legitimacy.