Having already looked at the political causes of market instability in the more distant past and through a theoretical lens, we now look at the more recent past. From the 1980s onwards UK finance in the City of London underwent significant change: another “City Revolution”. This is usually thought of as “Big Bang” though that was only one part of the story. Some of this change was deliberate, some of it the result of unintended consequences of previous change. All of it had political cause and market impact.

This story shows how a period of dramatic financial innovation was directly enabled through regulatory change: a specific, political choice to encourage financial innovation. With a new banking law in a liberalized City, the immediate question of what the state considered a bank was answered. As this period developed, however, market innovation itself changed what a bank was. That is, the activities a bank undertook in London changed, and the nature of that bank changed – in culture, in country of origin, and in relation to the supervisors. This led to a mismatch between the regulatory regime that enable the new form of banking and that regime's ability to control it. The end result was two significant, high-profile, and revealing bank failures.

This chapter starts by explaining the revolution in the City, then looks in detail at the Banking Act 1987, before moving on to examine the twin failures of BCCI and Barings in the early 1990s.

The 1980s City Revolution

The City changed drastically under Thatcher. This was not the result of a deliberate programme of reform by the new government, but rather came about through a series of unintended consequences, opportunistic moves, and pressure from the private sector. In so far as the outcomes of these processes were coherent with each other, this is because they all reflected Thatcherite principles even if they were not Thatcherite policies. The City at the end of this so-called “City Revolution” was more open internationally and less restricted internally. It had become a highly competitive engine of private-sector growth which, taken together with Thatcher's wider industrial policy, fundamentally reshaped the UK economy.