Whatever else she might be remembered for – Europe, the Falklands, the poll tax – the raft of financial deregulation Margaret Thatcher’s Government brought about paved the way for a twenty-year boom in financial services, a huge increase in personal and corporate debt and ultimately the crash of 2008.
In the context of Bank of Scotland and HBOS the removal of exchange controls, while they had no immediate effect, opened the way for Britain to join the globalisation of banking. The exposure of HBOS to overseas markets, particularly the US, was limited in comparison with the investment banks and its rival the Royal Bank of Scotland, but had exchange controls still been in place it would not have been able to hold as high a proportion of its assets in US mortgage securities as it did.
HBOS Treasury division lost £7.2 billion. As the Parliamentary Commission pointed out last week “losses on this scale alone would have required recapitalisation of the Group.” I am not arguing for exchange controls – their abolition undoubtedly enabled a big expansion in trade – but it was a factor.
So too was the removal of restrictions on building societies. It is possible to argue that this too led to substantial social and economic benefits, such as enabling a big expansion of home ownership. But it is worth remarking that none of the building societies which took advantage of the freedom to demutualise and turn themselves into banks now survive as independent companies.
Some, like the Woolwich and Cheltenham & Gloucester, were taken over while they were viable. Others like Northern Rock, Halifax (HBOS), Bradford & Bingley and Abbey had to be rescued.
There was a precedent for this in the deregulation in the 1980s of the Savings & Loans, or ‘Thrifts,’ the US equivalent of building societies. Freed of restrictions, nearly a quarter of the 3,200 institutions went bust. That was a lesson Britain ignored.
In 1986 the Thatcher Government also ushered in ‘Big Bang,’ an ending of restrictive practices in the London Stock Exchange, which was also the signal for the start of an era of massive expansion in financial services, with little regulatory constraint. ‘Self-regulation’ was the fashion. For the first time banks were allowed to buy stockbroking firms, market makers, insurance companies and investment managers.
The lines between banking and other services blurred and business models were developed which depended not on service to customers, but on cross-selling ‘products.’
In the United States the Glass-Steagall Act, the banking reforms which had followed the Wall Street Crash and the Great Depression, was not abolished until 1999, so American investment banks piled into London, making it the most important financial centre in the world.
With them came a new way of doing business: out went “my word is my bond” and in came caveat emptor, out went the banking diploma and in came the MBA.
The development of a global money market meant that banks no longer had to restrict their lending to the amount of deposits they could attract. The international market never closed. You could always finance a lending book, the only question was price. But as we now know, in 2008 the market did close, at least to companies like HBOS whose profligate lending made it a pariah.
There had been banking disasters before Mrs Thatcher, of course, and it would be wrong to blame her for the actions of the men who wrecked HBOS, but the balance of her legacy was boom on one side and bust on the other.