We have now finished our historical narrative of the UK's experience of banking regulation and stability since 1970. This has shown how the politics of banking regulation changes, regulation itself changes, changing what banks can do in the market and therefore financial stability. As in Chapter 6, here we pull together the overarching narrative of the last three chapters to pull out the key trends and then put them against the theoretical framework developed in the first chapters.

Recap of the narrative

We left the story in Chapter 6 with the failure of JMB and the increasingly poor relations between the Bank and Treasury caused by the affair. This led the government to want to reform the City. It did this through a host of reforms, as described in Chapter 7, which came to be called the City Revolution. This included the abolition of exchange controls, Big Bang and the 1986 Financial Services Act (FSA). This reform momentum then moved into the banking sector with the 1987 Banking Act which undid its 1979 predecessor. Practically speaking, this new Act worked, in as much as it solved the ideological problem described earlier in the book as to how to define a bank in law. The Thatcherite reforms of the City, including the 1987 Act, finally resolved the contradictions of previous piecemeal change to the financial framework. Now any institution that did “banking” would be a bank and under the Bank of England's supervision. This supervision would itself be within the wider City framework of self-regulatory organizations (SROs). This was an intellectually and policy-wise coherent approach to banking regulation, albeit one with a strong political-economic stance built into it: free market liberalism.

Where this framework fell down was in its interaction with the international scope of banking. While the new system might have worked in the UK context, the difference in regulatory stances and supervisory capabilities across the world gave great opportunities for banks to engage in regulatory arbitrage, both between jurisdictions and within them. This could happen fraudulently, as with BCCI, or prudentially as with Barings.