Secondary banking crisis of 1973–1975
Encyclopedia
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.
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. The downturn was exacerbated by the global 1973–1974 stock market crash, which hit England already in the midst of the housing price crash.
was rescinded, and the Bank of England, which had severely restricted the supply of credit for housing in 1971 release greater funds. The Bank of England's regulatory powers over lenders were increased in the 1979 Banking Act to prevent a repeat of the crisis. While housing prices and lending recovered in 1975, inflation continued to rise, leading to greater economic, labour, and political problems for Britain.
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.. Others blame the Heath government's fixing of rent price rises in 1971. 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.
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.
Great Britain
Great Britain or Britain is an island situated to the northwest of Continental Europe. It is the ninth largest island in the world, and the largest European island, as well as the largest of the British Isles...
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 oil shock, left these smaller institutions holding many loans secured by property with lower value than the loans. The Bank of EnglandBank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
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. The downturn was exacerbated by the global 1973–1974 stock market crash, which hit England already in the midst of the housing price crash.
Recovery
On 19 December 1974, a 1971 rent freeze by the Heath governmentEdward Heath
Sir Edward Richard George "Ted" Heath, KG, MBE, PC was a British Conservative politician who served as Prime Minister of the United Kingdom and as Leader of the Conservative Party ....
was rescinded, and the Bank of England, which had severely restricted the supply of credit for housing in 1971 release greater funds. The Bank of England's regulatory powers over lenders were increased in the 1979 Banking Act to prevent a repeat of the crisis. While housing prices and lending recovered in 1975, inflation continued to rise, leading to greater economic, labour, and political problems for Britain.
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 ExchequerChancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
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.. Others blame the Heath government's fixing of rent price rises in 1971. 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
United Kingdom general election, February 1974
The United Kingdom's general election of February 1974 was held on the 28th of that month. It was the first of two United Kingdom general elections held that year, and the first election since the Second World War not to produce an overall majority in the House of Commons for the winning party,...
. 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.
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
- Economic history of Britain. 1960–1979: the Sixties and Seventies
- History of the United Kingdom (1945–present)
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