Capital in British banking, 1920–1970
2007; Taylor & Francis; Volume: 49; Issue: 2 Linguagem: Inglês
10.1080/00076790601170231
ISSN1743-7938
Autores Tópico(s)Fiscal Policies and Political Economy
ResumoAbstract British banks have long attached great importance to capital. Currently they are subject to greater scrutiny and regulation on this issue than ever before. However, it was not until the disclosure of 'hidden reserves' in 1970 that a true picture of British banks' capital emerged. This article uses archival evidence to reveal the capital ratios of several major banks for much of the twentieth century, and demonstrates how these ratios were influenced by official restrictions. Overall the banks maintained much higher levels of capital than implied by their published accounts, although the impact of official restrictions was to force them to operate with lower capital ratios than they desired. But it is argued that capital ratios were neither achieved nor maintained at the expense of reduced or less risky lending. Keywords: BanksBanking HistoryCapitalCapital AdequacyHidden Reserves Acknowledgements This article comes out of a project ('Banks and Industrial Finance 1920–1971', co-investigators, Prof. Michael Collins (University of Leeds) and Dr Duncan Ross (University of Glasgow)) financed by the ESRC, whose financial support we gratefully acknowledge (Award number R000236447). The authors wish to thank the current and former archivists of the major banks: Sarah Millard (Bank of England); Maria Sienkiewicz and Jessie Campbell (Barclays); Edwin Green (HSBC); Karen Sampson and Dr John Booker (Lloyds TSB); Philip Winterbottom (Royal Bank of Scotland); and Fiona Maccoll (formerly of National Westminster). Previous versions were presented at the Accounting, Business and Financial History Conference, September 2001, and the Third Accounting History International Conference, September 2003. We thank Tony Arnold, Kees Camfferman, David Goacher and Derek Matthews. Notes 1 Holmes and Green, Midland, 52 and 328. 2 See Edwards, Company Legislation and Changing Patterns of Disclosure, 51–53, for a discussion of the use of hidden reserves. Edwards, A History of Financial Accounting also deals with the wider development of financial reporting. 3 Lloyds Bank, 1954, Chairman's Statement by Sir Oliver Franks. 4 Barclays Bank, 1973, Chairman's Statement by A.F. Tuke. 5 Tuke and Gillman, Barclays Bank, 25–26. See also Ackrill and Hannah, Barclays, 135–136. 6 This is probably understandable: the 1959 report of the Radcliffe Committee focused on monetary policy with an emphasis on liquidity, and the 1968 report of the Monopolies Commission into the proposed merger between Barclays, Lloyds and Martins banks focused on efficiency and competition. 7 UK National Board for Prices and Incomes, Report on Bank Charges, paras. 35–38. 8 Ibid., para. 35. 9 Ibid., para. 38. 10 Ibid., para. 178. 11 Barclays issued loan capital on the acquisition of Martins in 1968, although its international subsidiary, Barclays (DCO), had done so in 1966 (Ackrill and Hannah, Barclays, 199). National Westminster issued debt capital when it was formed through the merger of National Provincial and Westminster banks in 1969. Lloyds and Midland banks did not issue debt capital until after 1970. 12 See Billings and Capie, "Non-disclosure, Trust and Stability." 13 Barclays, Lloyds, Midland, National Provincial and Westminster banks. 14 See, for example, Jones, "Competition and Competitiveness"; Capie and Billings, "Evidence on Competition"; Ackrill and Hannah, Barclays, 116–120. 15 Turner and Hickson, "Shareholder Liability Regimes." 16 Collins and Baker, "English Commercial Bank Liquidity." 17 Thomas, The Finance of British Industry, 54–55: 'the ratio of paid up capital to total deposits for all banks fell from the pre-war level of 10% in 1910 (The Economist's estimate) to 6% in 1918 … amalgamation schemes usually meant a reduction in the total paid-up capital and uncalled liability of the two pre-amalgamation banks. In order to strengthen the position several appeals were made in 1919–20 to the capital market'. Ibid., footnote: 'The total paid up capital of all banks rose from £68.9 m. in 1919 to £94.0 m. at the end of 1922; Sykes, [The Amalgamation Movement,] p.102.' Also see Wilcox, Capital in Banking, 10–11. 18 Thomas, The Finance of British Industry, 55. Other reasons given were that size allowed the diversification of lending portfolios, banks needed to be larger to keep pace with increasing industrial concentration, and the fulfilment of post-war reconstruction needs. 19 Bank of England Archive, London (hereafter BoE), C40/1095, "Various Clearing Bank reports to Bank for Plans for Capital Structure 1962–1973," fo. 46, para. 2, 'Ratio to Equity Capital' in note on 'Issue of Fixed-Interest Capital by banks' headed 'secret' addressed to 'Mr Morse and The Deputy Governor', 17 Feb. 1966. 20 BoE, EID4/36, fo. 22, and EID4/38, fo. 4. Five other small banks made up the total of 11 clearing banks at this time. 21 See BoE, C40/101, "Clearing Bank Balances Sheets – Capital, Window-Dressing etc. 1942–1957," for the Bank's side, and Winton, Lloyds Bank, 114, for the position of one of the banks. 'One of Lord Franks' prime aims during his term as chairman (1954–62) was to restore the [capital] ratio to a level more in keeping with the bank's scale of business'. Ibid., 16. 22 Ackrill and Hannah, Barclays, 135. 23 BoE, C40/102, "Clearing Bank Capital 1957–1962," fo. 3. 24 This raises the interesting, but separate, question that: 'There is, perhaps, some basic anomaly in the requirement that assets held for reasons of commercial prudence should also act as instruments of monetary control', Wesson, Bank Capital and Risk, 20. 25 As done in the 1950s and 1960s when the market value of investments was below book value – see Billings and Capie, "Non-disclosure." 26 BoE, C40/102, "Clearing Bank Capital 1957–1962," fo. 10C, 'Note to the Chief Cashier and the Governors', author not identified, 26 Sept. 1958. 27 See BoE, C40/101, "Clearing Bank Balances Sheets – Capital, Window-Dressing etc. 1942–1957." 28 Partly-paid shares became usual among joint-stock banks in the nineteenth century after the failure of the (unlimited) City of Glasgow Bank. The uncalled liability on partly-paid shares (called 'reserved liability' or 'reserve capital' if callable only on winding up) was considered additional security for depositors. See, for example, Holmes and Green, Midland, 62–63; Sayers, Lloyds Bank, 220–222; Turner and Hickson, "Shareholder Liability Regimes." Different classes of share were also common until the 1950s – see, for example, Tuke and Gillman, Barclays Bank, 27–28. 29 For example, trustees were barred from investing in partly-paid shares. 30 Economist, "Streamlining the Westminster," 18 May 1957. 31 Ackrill and Hannah, Barclays, 136. 32 Scammell, The London Discount Market, 227–231. 33 Crossley and Blandford, The DCO Story, 146 and 169. 34 See Alfon et al., What Determines How Much Capital is Held? for a recent discussion of relevant issues. 35 Two technical points on the RARs should be noted. Firstly, we excluded the values of outstanding foreign exchange contracts at balance sheet dates as these were not given by all banks – these would otherwise attract a 50 per cent weighting. Secondly, modification of the Basel I Accord required the allocation of capital to cover market risk (for example, arising from price fluctuations of securities holdings). We have not attempted to reflect this in our RARs. Both factors would reduce RARs by increasing RWAs. 36 Capie and Billings, "Evidence on Competition," 93. Wilcox, Capital in Banking, 17 and 28, argues that the banks were only able to rebuild their capital positions in the 1960s after the relaxation of lending controls allowed them to expand advances, their most profitable asset. But this underestimated profitability in the 1950s. 37 Ackrill and Hannah, Barclays, 98–99 and 448–455. The Basel I Accord allows general, rather than specific, bad debt provisions to be counted as capital subject to certain limits. 38 Ibid., 199–200; Winton, Lloyds Bank, 185. The banks were to need their capital strength in the secondary banking crisis in the 1970s, but that is another story. 39 Holmes and Green, Midland, 244–245. 40 Capie and Billings, "Profitability," 380–381. The Midland's percentage returns on capital or total assets, although not always the lowest among the Big Five, were generally at the lower end of the scale in the 1950s and 1960s. 41 For a discussion of the arguments about the alleged failure of banks to lend to industry, see Ackrill and Hannah, Barclays, 90–91, 141–142, 144–147; Capie and Collins, Have the Banks Failed British Industry?; Collins, "English Bank Development." 42 Barclays Bank, 1930, Statement by Chairman (Goodenough). 43 Midland Bank, Chairman's Statement, Annual General Meeting (AGM), 1933. 44 Ibid., 1935. 45 Ibid., 1937. 46 Ackrill and Hannah, Barclays, 136. 47 Lloyds Bank Archive, London (hereafter Lloyds), 2429/2, Chairman's Personal File 'C', contains three slightly different versions of a document entitled 'New Capital'. From 1946 the Bank expected banks to maintain a minimum ratio of cash to deposits of 8 per cent and from 1951 a ratio of liquid assets to deposits of between 28 and 32 per cent (a minimum of 30 per cent from 1957, reduced to 28 per cent from 1963). Capie and Webber, A Monetary History of the United Kingdom, 222. 48 Westminster Bank Archive, London (hereafter Westminster), 7490, 'Capitalization 1934–1937', typewritten "Memorandum for Board of 5th January 1937." 49 Lloyds, 'research file' compiled by Winton, "Investments by Lloyds Bank in Other Banks," memorandum by joint chief general managers, Wilson and Parkes, 21 July 1943. 50 Westminster, 7490, "Capitalization 1934–1937," typewritten "Memorandum for Board of 5th January 1937." In contrast, in Basel-style RARs fixed assets carry a zero weight. 51 This serves as a reminder of the complexity of the 'cartel' in banking, the official tolerance of which was considered to reflect its usefulness as a device for stability. See Capie and Billings, "Evidence on Competition" for further discussion. 52 For example, data published in Jones, British Multinational Banking, could allow comparisons to be made to British banks operating internationally. 53 Capie and Billings, "Profitability in English Banking," 398–400, provides a comparison and detailed assessment of the data used. 54 Capie and Billings, "Accounting Issues," 229–235. 55 Modern capital and risk management techniques such as Value at Risk (VaR) and 'stress testing' require banks to examine such situations, but financial markets are very different today. 56 Indications of the understatement of the value of premises are that Lloyds' first revaluation in 1964 raised our capital Measure 1 by 12 per cent and Barclays' 1969 revaluation raised the same measure by 17 per cent (Capie and Billings, "Profitability," 372, note 14). See Capie and Billings, "Accounting Issues," 237–238, for further discussion of issues related to the valuation of fixed assets. 57 Westminster, 7737, "Capital Structure and Dividends, 1958–1963." Additional informationNotes on contributorsMark Billings Mark Billings is Lecturer in Accounting and Risk at Nottingham University Business School. Forrest Capie Forrest Capie is Professor of Economic History, Faculty of Finance, Cass Business School, City of London and currently seconded to the Bank of England.
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