The birth of modern UK Banks

“Modern” UK banks evolved following the Crown’s dissolution of the monasteries (more traditional keepers of money) in the 1530s.

That said, it was not really until approximately 400 years ago, during the mid-1600s, that London really started to cement its position as a financial hub of importance when goldsmith bankers started to emerge, following King Charles I seizure of gold deposited in the Tower of London and the English Civil War, as a safe-haven (away from the clutching arms of the Crown!) for the gentry and aristocracy to deposit their money and valuables.

 

Shortly after this period (circa. 1677), there were a recorded 44 goldsmith bankers in London acting as ‘keepers of running cash’ – who ran their business on a ‘personal liability basis’. However, strict legal controls on how big goldsmith bankers could become (because of the strict ‘personal liability basis’), together with poor transportation and communication, combined to restrict the growth of these into national UK banks [evidenced of this can be seen in the fact that in 1784 the total number of UK banks exceed 100; but only 7 had more than one office].

The wind of change

Following a number of prominent UK bank collapses in the early 1820s, parliament finally relaxed the laws governing who could own banks to allow for joint stock banking (1826) [A notable exception to this was the establishment of the Bank of England as a joint stock bank some 200 years before this legislation].

Importantly, joint stock banking allowed the owners of UK banks to spread the risk among a number of proprietors. This, combined with the Industrial Revolution, better transportation and faster means of communication all resulted in a growth of more national banks in the UK. Prominent among these was the foundation, in 1833, of the National Provincial Bank of England (later to become National Westminster Bank – NatWest), the first UK bank established with the specific agenda of being a national bank.

Although UK banks began to expand nationally during this period, the services they (did and could) offered did not. Consequently, it was also around this time that another division in UK banks began to emerge; namely the formation of the Big Three banking sectors:
1. Clearing “High Street” Banks – even as recently as 1900 there were a reported 250 private and joint stock banks operating in the UK;
2. Merchant Banks; and
3. Other financial institutions; such as Building Societies – which came into being following 1874 legislation.

The end of World War II

Aside from the changes that both World Wars enforced on the workplace of UK banks, not much changed with regard to the services that UK banks offered – as they were largely restricted under legislation in place at the time to the provision of loans, current accounts, and safe-custody facilities.
Three basic changes, following the end of the Second World War, were soon to change the face of domestic UK Banks beyond all recognition.

The first of these happened in the 1950s when the British government finally began to relax the limitations on the financial services that UK banks could offer. This resulted in UK banks offering such products as cheque guarantee cards and Automated Teller Machines (ATMs) for the first time [And, if you are interested in banking firsts, the bank that claims to have first used ATMs in the UK is the Royal Bank of Scotland].

The second of these events happened in the late 1960s (1968-1970) when the British government signalled its acceptance to more bank mergers. This effectively resulted in the Big 5 high streets banks of the time.

The third and final of these happened in 1971 when, again, the British government encouraged UK banks to be more competitive by offering a wider range of services to its customers. The result of this was the introduction of saving accounts (hard to imagine that savings accounts are a new banking concept isn’t it!), credit cards, personal loans, more modern ATM functions, and home loans.

Building societies become banks

Without doubt the biggest change in UK banks, and the services they offer, over the last 20 years occurred following a number of acts of parliament that effectively did away with the limitations on building societies raising funds.

Previous to this, building societies had been limited to raising funds from its individual members’ deposits (hence the reason banks didn’t need to have deposit accounts until so late in the day) and from lending to members to purchase homes (this, together with the UK banks major miscalculation of the home equity market in the early 1970s, accounted for the reason why UK banks rarely leant on home mortgages).

 

However, with these restrictions on fund raising and services offered by these financial institutions no longer in place, the division between UK banks and building societies became blurred and today are either one in the same, or have merged into one another (for example, Lloyds Bank and the Trustee Savings Bank to become Lloyds TSB).

UK banks today

Entering the 21 century UK banks appear to be at their strongest for decades. The banks today are more competitive, offer more services, and are more client friendly than at any time throughout the long and distinguished history of UK banks. With prudent management and regulation, there should be no reason why UK banks don’t continue to go from strength-to-strength. Underlying all of this development in UK banks is, however, still the old Roman concept of banking:
“to receive deposits and advance credit"

 

 

Useful Related Sites:

UK Bank of England - Information on UK Banking from the Bank of England