Jubilee Special: 60 Years Of Banks

Published in Investing on 1 June 2012

Cliff D'Arcy tracks the progress of Royal Bank of Scotland, Lloyds Banking and Barclays.

With Britain celebrating the Queen's Diamond Jubilee, I'm reviewing the history of British banking since Her Majesty became our head of state in 1952.

To help me, I grabbed my copy of Other People's Money: The Revolution in High Street Banking (2005), an excellent history by David Lascelles, former banking editor of the Financial Times.

A banking revolution

I'm not going to describe the chronological timeline of British banking, as that strikes me as a bit dull. Instead, I will set out a dozen themes to explain the evolution of banking from the Fifties to the Noughties.

1. From gentlemen to salesmen

The bank manager was a post-war pillar of society, enjoying a social status on par with the local doctor, lawyer, vicar and headmaster. Most likely public-school educated, this traditional banker would use his personal judgement and connections to grant loans and dispense independent financial advice.

During the Thatcher years, all this changed, as deregulation allowed banks to take more risk, sell a wider range of products and boost their profit margins. As a result, the personal touch vanished, so managers no longer personally knew all of their business clients. This depersonalisation of banking explains the increasing appeal of old-school private banking to today's top 1%.

2. The 3-6-3 rule dies

The old-school law of banking used to be the 3-6-3 rule: pay savers 3%, lend at 6% and tee off on the golf course at 3pm. This gave banks a generous net interest margin of 3%, enabling them to pay solid dividends.

Over time, banking has become less about boring old lending, and more about cross-selling as wide a range of pricey products to as many customers as possible. Instead of being provincial and conservative, banks have become more predatory, poaching customers from each other using introductory incentives. Today, new customers are more prized than loyal patrons.

3. The rise of women

From the Fifties to the Seventies, banking was a wholly male-dominated world. Indeed, the first woman bank manager was appointed only in 1958. Since the late Seventies, ever-more women have entered this realm. Nowadays, banks employ more women than men, but mostly in lower-paid jobs, while bank boards remain dominated by overpaid males.

4. From high tea to IT

Post-war banking was a world of clerks, ledgers and quill pens. As information technology (IT) advanced from the Fifties onwards, banks rode this trend by automating routine processes. They became one of the biggest buyers of mainframe computers, with Barclays (LSE: BARC) and Midland Bank leading the way in IT innovations.

For example, Barclays was the first bank in the world to introduce cash machines: the first 'hole in the wall' was opened by On the Buses star Reg Varney at Barclays' Enfield, north London branch in June 1967. Today, there are over 65,000 cash machines in the UK. Also, most lending decisions are made today by sophisticated credit-scoring software, rather than by individuals.

5. From branches to smartphones

In 1950, the UK had 10,000 bank branches, three times as many as in 1900. By 1990, this total exceeded 16,000, but has since fallen below 9,000.

Bank branches are dying out for two reasons: first, maintaining a high-street presence is expensive, so closing branches cuts costs, especially after mergers and takeovers. Second, the growth of telephone, Internet and mobile banking, plus wider usage of automated kiosks, mean fewer customers visit branches for their everyday banking needs.

This trimming of branches has left many rural communities with no local bank, showing how banking has become global, rather than local.

6. Innovation and complexity

High-street banking used to be about three simple things: current accounts, savings accounts and business lending. Today, banks have evolved into infinitely complex beasts, offering thousands of different products to borrowers, savers, investors and businesses.

They also became giant casinos by making markets (and trading for profit) in a wide range of financial securities, such as bonds, commodities, credit and interest-rate derivatives, and the like. Banks also have investment-banking divisions that help companies raise money within the world's capital markets.

No longer is banking about vanilla lending and saving. In the Nineties and Noughties, banks 'pushed the envelope' to make profits from every possible financial flow. Unfortunately, this directly caused the great crash of 2007/09.

7. Mis-selling scandals

With the replacement of traditional bankers by slick salesmen, mis-selling scandals emerged. Driven by sales targets, bank staff sold highly profitable -- yet unsuitable -- products to millions of unsuspecting customers.

As a result, the UK has seen a conveyor belt of mis-selling scandals from the Eighties onwards, involving mortgage endowments, personal pensions, payment-protection insurance, high-income precipice bonds, split-capital investment trusts, with-profits policies, equity-release plans and so on.

This chain of scandals helped to destroy the trust the public once had in bankers.

8. Beating the building societies

Until the early Eighties, mortgage lending was controlled by a legal cartel of building societies. Then Mrs Thatcher's financial deregulation allowed banks to enter the mortgage market. As a result, the market share of building societies for new mortgages collapsed from 100% to below 33% today. Indeed, Nationwide BS is the only building society among the UK's top six lenders.

9. Safe as houses

The greatest post-war boom in banking was the surge in lending and wealth created by the incredible rise in house prices. The Nationwide BS House Price Index is the only index going all the way back to when Queen Elizabeth II ascended the throne in 1952.

Sixty years ago, a typical home cost £1,891, but house prices then set off on a 35-year winning streak, rising every year from 1955 to 1990. At the end of the Eighties boom, the average price was £61,495. Six years later, the Nineties crash had reduced this figure to £50,930, before another property boom pushed this average to £183,959 by the end of 2007.

Today, the average stands at £162,722, so house prices have rolled back six years (but not in London, where this dangerous boom continues).

10.From debt to credit

In the post-war period, banks prided themselves on their ability to make their customers more money. However, since the Eighties, the main role of banks has seemingly been to drive Britain deeper into debt. Here are the mortgage and other personal debts of Brits at five-year intervals since 1987:

Year endMortgage debt (£bn)Other debt (£bn)Total (£bn)
Mar 20121,2502081,458

As you can see, as 'debt' was cunningly renamed 'credit', our personal indebtedness exploded, soaring from just over £200 billion 25 years ago to nearly £1.5 trillion. This must be the biggest legacy of British banking during our Queen's reign.

11.Bigger is better

In June 1957, The American Banker magazine listed the world's ten largest banks by deposits. These included the UK's three biggest banks at that time: Midland Bank (4th), Barclays Bank (5th) and Lloyds Bank (7th).

Over the next 50 years, British banking became increasingly more concentrated, as smaller banks were taken over by their larger rivals. In the Sixties, the Big Five became the Big Four, as National Provincial and Westminster came together to form NatWest. The Big Four banks gradually consolidated their control until they dominated more than four-fifths (80%) of business and personal banking.

Notable acquisitions and mergers in the past 20 years include HSBC (LSE: HSBA) buying Midland Bank in 1992, Royal Bank of Scotland (LSE: RBS) taking over NatWest in 2000, and Lloyds Bank's 'shotgun wedding' with HBOS in late 2008 to become Lloyds Banking Group (LSE: LLOY).

Today's Big Four -- all members of the blue-chip FTSE 100 index -- are Barclays, HSBC, Lloyds and RBS. Upstart HSBC is the giant of the four, with a market value of £92 billion. Together with Standard Chartered (LSE: STAN), UK-listed banks account for a ninth (11%) of the blue-chip FTSE 100 index.

12.Britain's big bailout

The go-go Noughties accelerated the theme of the Eighties and Nineties: for banks to become bigger and more profitable at all costs.

This drive towards leverage and growth saw the Big Four banks make a combined profit before tax nearing £40 billion in 2007. Then came the biggest financial crash in history, driven by the credit crunch that started in August 2007, falling house prices and the collapse of US subprime mortgages.

This meltdown led to the full nationalisation of loose lenders Northern Rock in February 2008 and Bradford & Bingley in September 2008. Also, British taxpayers saved RBS and Lloyds with cash injections of £45.2 billion and £17.4 billion respectively. In short, banking profits were privatised, while their huge losses were socialised.

How the mighty (and greedy) have fallen!

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Further Jubilee investment opportunities:

> Cliff does not own any shares mentioned in this article. 

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goodlifer 03 Jun 2012 , 1:02pm

My totally unscientific impression is that banks, building societies and other financial institutions were systematically deregulated in the nineteen eighties.
That's how unregulated greed was able to bring us, with all the inevitability of a Greek tragedy, to our present economic woes.

On this view, the person ultimately responsible for all this is Mark Thatcher's mother.
Together with Howe, Heseltine, Lawson, Lamont, Major and all of us who voted for her.

Not that Blair, Mandelson, Brown or Balls lifted a finger to try and stop the rot.

What do you think?

ANuvver 03 Jun 2012 , 7:52pm

Blair et al accelerated the process to easy political advantage and are now standing tutting, poking at the job and sanctimoniously claiming that something must be done.

Money is like water - it flows round the cracks to settle where it wants to be. And sometimes it stagnates or evaporates. This is nothing new.

MigginsPies 04 Jun 2012 , 11:24am

Maybe I'm naive - but if an individual or country lives way beyond their means - it will all end in tears. Looking for someone to blame is not the answer - the fundamentals of contract, caveat emptor, need to be followed.

goodlifer 04 Jun 2012 , 12:51pm

"Looking for someone to blame is not the answer."
Yes and No.
I don't think there's a simple "The answer."

I do think it may help to realise we're all to blame really - we voted these ghastly people in and allowed them to feather their own nests at our expense.

It's tempting to treat it all as just water under the bridge, while we allow similarly ghastly people do very much the same with our pensions and the NHS - and maybe much more else

sonrisa1 04 Jun 2012 , 1:01pm

It was all so obvious(to me) that something was badly wrong, so why did not those who should have blown the whistle did not(my answer), they were doing so well & did not want it to stop or appear to be party poopers.
I first bought a house in 1966 & sold in1973 for 7x what I had paid, but had spent money to improve with central heating, large garage & many other things. this now seems ridiculous & I have heard last time it was sold about 200x that which I had originally paid.
In 1982 bought & then sold in 2005 for 15 x, of course I had done a lot of work in the meanwhile, but as I said at the time by 2000 I could no longer have been able to afford to buy my own house, so could not see how others could unless with enormous crippling Mortgages.

Jimi97 04 Jun 2012 , 6:32pm

Banking is sheer magic. If I lend you money I don't have, I gain an asset (debt). You then pay me for the new asset we both have (interest). Finally, you give me back real (?) money. It all works wonderfully well until the music stops!

couldnotmakeitup 06 Jun 2012 , 8:37pm

Hello goodlifer, spot on, in fact extremely spot on. On this one
I am with you all the way!

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