Secondary banking crisis of 1973–75

The Secondary Banking Crisis of 1973–75 was a dramatic crash in property prices in Great Britain which caused dozens of small ("secondary") lending banks to be threatened with bankruptcy.

Crisis

These secondary banks, like the larger institutions, had been lending based on the then recently rising housing prices in the late 1960s and early 1970s, and borrowing heavily to hold the loan assets. The rise in housing prices was seen as the last hurrah of the British Post-War boom. A sudden downturn in housing market prices coupled with hikes in interest rates, well before the November 1973 oil crisis, left these smaller institutions holding many loans secured by property with lower value than the loans. The Bank of England, led by Jasper Hollom,[1] conducted negotiations that bailed out around thirty of these smaller banks, and intervened to assist some thirty others. While none of these banks were left unable to pay depositors, the Bank of England lost an estimated £100 million.[2] The downturn was exacerbated by the global 1973–1974 stock market crash, which hit the UK when it was already in the midst of the housing price crash.

Recovery

On 19 December 1974, a 1971 rent freeze by the Heath government was rescinded, and the Bank of England, which had severely restricted the supply of credit for housing in 1971, released greater funds.[3][4] While housing prices and lending recovered in 1975, inflation continued to rise, leading to greater economic, labour and political problems for Britain. The Bank of England's regulatory powers over lenders were increased in the 1979 Banking Act to prevent a repeat of the crisis.

Causes

The causes of the Banking Crisis remain a source of debate. Some blame the lax regulation of lenders, and policy driven inflationary pressures (the so-called "Barber Boom", after Chancellor of the Exchequer Anthony Barber) which failed to even correct its initial target: high unemployment rates. A sudden tightening of credit (interest rates were raised to 13% in October 1973), is laid at the feet of the Bank of England.[5] Others blame the Heath government's fixing of rent price rises in 1971.[3] The only book length study of the crisis by Reid (1982) blames all these factors, a bubble of housing prices that saw a 50% increase in London real estate prices over 1971 and the financial uncertainty caused by the end of the Bretton Woods agreement and the inconclusive general elections of February 28, 1974. This period was also marked by a series of crises, including the political uncertainty of the Heath government, waves of public sector and industrial strikes, and oil shortages which for a time lead to government institution of a three-day work week. But Reid also blames the entire market culture of the London banking institutions from the late 1960s, which in her view made market speculation (and pursuant crashes) inevitable.[2]

These conclusions may be treated with some caution, as Reid's study makes no attempt to deal with the root causes of the economic instability of the early 1970s, which lay in unsustainable economic policies of the 1960s that were feeding through in the latter part of the economic cycle. By 1971, the cycle had reached a stage where the Government had little effective control over the medium and long term consequences, which were rooted in the devaluation crisis of 1967 and the economic downturn of 1968.

See also

References

  1. ↑ "Sir Jasper Hollom", The Times, 17 September 2014, p. 54.
  2. 1 2 Margret Reid. The Secondary Banking Crisis, 1973–75: Its Causes and Course. Macmillan, London (1982)/ 2nd ed, Hindsight, London (2003) ISBN 978-0-9541567-2-5
  3. 1 2 Ringshaw, Grant (1 February 2003). "Why we should fear a nasty 70s revival". Daily Telegraph. Retrieved 2007-09-11.
  4. ↑ Glyn Davies. A History of Money from Ancient Times to the Present Day, rev. ed. Cardiff: University of Wales Press, 1996. ISBN 0-7083-1351-5 pp. 406–407, 414, 419–425
  5. ↑ Led Zeppelin, soaring oil and house prices: is it 1973 all over again? Larry Elliott, economics editor, guardian.co.uk, Friday September 14, 2007.
    Andrew Sheng. Role of the Central Bank in Banking Crisis: An Overview. in Patrick Downes, Reza Vaez-Zadeh, International Monetary Fund Central Banking Dept, (eds.) The Evolving Role of Central Banks: Papers Presented at the Fifth Seminar on Central Banking, Washington, D.C., November 5–15, 1990. International Monetary Fund, (1991) ISBN 978-1-55775-185-0
    "The English secondary banking crisis of 1973–75 was mainly the result of overborrowing on the part of real estate and securities firms and by the collapse of property and share prices following tight monetary policy in the wake of the 1973 oil crisis." p. 204
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