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 end||Mortgage debt (£bn)||Other debt (£bn)||Total (£bn)|
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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> Cliff does not own any shares mentioned in this article.