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This chapter analyses the changing risk culture of UK clearing banks by charting the rise of more active asset and liability management. We focus particularly on the banks’ entry into the wholesale money markets and residential mortgage lending. The pattern of household property tenure changed significantly over the twentieth century. Before World War One less than a quarter of English households owned their homes. There was little demand for mortgages, and even less appetite on the part of bankers to supply them. By 2006, nearly three-quarters of English households were owner-occupiers with mortgages comprising two-thirds of clearing bank assets. The banks had transformed from conservative institutions that largely matched short-term retail deposits with short-term assets into real-estate lenders heavily reliant on wholesale funding. This asset-liability maturity mismatch was at the heart of the Global Financial Crisis. We conclude that the regulatory changes implemented in the wake of the Crisis have failed adequately to address this fundamental issue.
The financial collapse of 2007–8 has questioned our assumptions about the underlying basis for stability in the financial system, and Anthony Hotson here offers an important reassessment of the development of London's money and credit markets since the great currency crisis of 1695. He shows how this period has seen a series of intermittent financial crises interspersed with successive attempts to find ways and means of stabilizing the system. He emphasises, in particular, the importance of various principles of sound banking practice, developed in the late nineteenth century, that helped to stabilize London's money and credit markets. He shows how these principles informed a range of market practices that limited aggressive forms of funding, and discouraged speculative lending. A tendency to downplay the importance of these regulatory practices encouraged a degree of complacency about their removal, with consequences right through to the present day.