The UK: Financial Globalization and Formalization of Banking Supervision

Among the developed economies, the UK was the latest to formalize banking supervision as we define it in this book. The process began in the mid-1970s following the fringe bank crisis and the simultaneous beginning of international cooperation on banking regulation matters in the Basel Committee on Banking Supervision. The crisis led to the reforms of both the Banking Act and the Bank of England Act in 1979—the Bank of England was assigned its first formal duties and responsibilities for banking supervision, and the commercial banks had to meet bank-specific requirements instead of the general corporate law. However, given the reluctance of the Bank of England to conduct banking supervisory activities as well as the Bank’s behavior to stick with the conventional informal “governor’s eyebrow,” we deem the formalization process ongoing until the reforms of 1987. The Banking Act 1987 clarified the Bank of England’s responsibilities and mandate regarding banking supervision, and the Board of Banking Supervision was established as a permanent formal organization to monitor and council the Bank of England on supervisory matters. The UK is an interesting case where the banking supervision remained informal until quite recently—compared to other countries. The formalization process can be explained by the crisis and the international push for harmonized banking regulation.