Recently, the Office for Budget Responsibility said the UK economy is more damaged by the banking crisis than previously admitted. Also, in the US a report by the Federal Reserve says economic recovery is much slower than expected, despite its recent comeback under the Obama administration. In the UK, it’s not surprising that perhaps government, banks and others don’t know the best strategy for handling the aftermath of the recent crisis, possibly because the UK has not experienced a banking crisis since 1866. Certainly, one would think that much has changed since then, but if this is the case why did the UK experience a crisis this time and not during other periods in history when national economies throughout the world (especially the US) collapsed? These are some of the questions being asked by researchers part of the Tipping Points work package ‘Financial Crisis in the Banking Sector: Present and Past’. It consists of researchers in history, law, economics and other relevant fields who will attempt to answer why financial crises occur in the UK.
So-called ‘irrational exuberance’ will be investigated as many have blamed bankers themselves for causing the crisis. Is there a culture of banking that actually leads to risky behaviour and poor management practices that could provoke a crisis? Unlike physical hazards like earthquakes and landslides (which are just as unpredictable, if not more so) financial hazards have a very large social and cultural component. People often take for granted the idea of money and banks and the roles they play in a financial system. If financial crises tell us anything, it’s that money can be extremely volatile. It can seemingly disappear one moment and reappear the next and such is the case with banks. Not long ago, Northern Rock branches were shutting down everywhere and their old adverts in the streets of London were peeling away. Since Northern Rock was nationalised in 2008, they now miraculously seem to be everywhere again. Perhaps it will be considered a ‘safe bank’ once more (thanks to a capital transfusion with tax payer money) and more and more people will put their money in it again. But if Northern Rock (or other banks like it) do crash again maybe we could be a bit smarter and ensure that it doesn’t become a catalyst for the next financial crisis in the UK.
We know the media love a good crisis and a financial crisis is often one of the most compelling stories that expose everything from ‘bank runs’ to severe financial cuts that current government is implementing today and of course the blame-game. New rules to prevent corruption within UK banks need to be implemented, but it won’t be done without a fight and if banks don’t like how business is going in the UK they can threaten to move elsewhere. The UK’s biggest banks have already tried to prove that tighter rules will lead to 1trn being drained from the UK economy, but is it really wise to pretend that the recent crisis was at worse a mistake and that no further outside intervention is necessary? One of the major reasons London is a financial centre of the world is because the laws governing banks are so liberal, so relaxed that it encourages a thriving financial market, but when does it come to a tipping point when less regulation lands the world in the middle of a crisis? One of the major questions posed by the Tipping Points project is whether tipping points actually exist within financial systems to begin with. If they do, it might not only be irrational bankers and liberal financial laws that cause financial crises, it could involve every aspect of the global economic system and if this is the case, it will take more than new regulations to resolve financial crises in the UK and throughout the world.