Big Bang (financial markets)

For other uses, see Big Bang (disambiguation).
Bishopsgate in London

The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to electronic, screen-based trading, effected by Margaret Thatcher in 1986.

The Big Bang was the result of an agreement in 1983 by the Thatcher government and the London Stock Exchange to settle a wide-ranging anti-trust case that had been initiated during the previous government by the Office of Fair Trading against the London Stock Exchange under the Restrictive Trade Practices Act 1956. These restrictive practices included the London Stock Exchange's rules establishing fixed minimum commissions, the 'single capacity' rule (which enforced a separation between brokers acting as agents for their clients on commission and jobbers who made the markets and theoretically provided liquidity by holding lines of stocks and shares on their books), the requirement that both brokers and jobbers should be independent and not part of any wider financial group, and the stock exchange's exclusion of all foreigners from stock exchange membership.[1]

The day the London Stock Exchange's rules changed on 27 October 1986 was dubbed the "Big Bang" because of the increase in market activity expected from an aggregation of measures designed to alter the structure of the financial market.

The effect of the Big Bang led to significant changes to the structure of the financial markets in London. The changes saw many of the old firms being taken over by large banks both foreign and domestic and would lead in the following years to further changes to the regulatory environment that would eventually lead to the creation of the Financial Services Authority.[2]

Policy

In the UK, Big Bang became one of the cornerstones of the Thatcher government's reform programme. Prior to these reforms, the once-dominant financial institutions of the City of London were failing to compete with foreign banking. While London was still a global centre of finance, it had been surpassed by New York, and was in danger of falling still further behind.

Thatcher's government claimed that the two problems behind the decline of London banking were over-regulation and the dominance of elitist old boy networks and that the solution lay in the free market doctrines of competition and meritocracy.

Consequences

The effects of Big Bang were dramatic, with London's place as a financial capital decisively strengthened, to the point where it is arguably the world's most important financial centre.[3][4] The boom resulted in the relocation of institutions into new developments in the nearby Isle of Dogs area, particularly that of Canary Wharf.

Although the "Big Bang" eased stock market transactions there is a debate in the UK about how far it affected the 2007–2012 global financial crisis and in 2010, Nigel Lawson, Thatcher's Chancellor at the time, appeared on the radio programme Analysis to discuss the banking reform. He explained that the 2007–2012 global financial crisis was an unintended consequence of the "Big Bang".[5] He said that UK investment banks, previously very cautious with what was their own money, had merged with high street banks putting depositors' savings at risk and ...according to the programme led US banks to follow suit.[5]

In 2011 Gordon Brown said that deregulation of the banking sector by the incoming Labour Government of 1997 had also contributed by failing to understand how interdependent the banks were. Speaking at the Institute for New Economic Thinking's annual conference in Bretton Woods, New Hampshire, USA, Brown, Chancellor from 1997–2007, reviewed his changes:

"We know in retrospect what we missed. We set up the Financial Services Authority (FSA) believing that the problem would come from the failure of an individual institution," he said. "So we created a monitoring system which was looking at individual institutions. That was the big mistake. We didn't understand how risk was spread across the system, we didn't understand the entanglements of different institutions with the other and we didn't understand even though we talked about it just how global things were, including a shadow banking system as well as a banking system. That was our mistake, but I'm afraid it was a mistake made by just about everybody who was in the regulatory business."

BBC Article: Gordon Brown admits 'big mistake' over banking crisis.[6]

Similar events

Subsequent similar actions, such as the deregulation of the Japanese financial markets in 2001, have analogously also been tagged with the phrase Big Bang.

See also

References

  1. ↑ "Big Bang 20 years on" (PDF). Centre for Policy Studies. October 2006. Retrieved 14 June 2015.
  2. ↑ "In Depth – Big Bang". Financial Times. 29 October 2006. Archived from the original on 15 November 2006. Retrieved 29 October 2006.
  3. ↑ Danny Fortson (26 October 2006). "The day Big Bang blasted the old boys into oblivion". The Independent.
  4. ↑ Treanor, Jill (27 October 2006). "Revolution hailed but City warned of a looming fight for supremacy". The Guardian. Archived from the original on 4 November 2006. Retrieved 29 October 2006.
  5. 1 2 "A price worth paying?". Analysis. 1 February 2010. 0–13 minutes in. BBC Radio 4. Retrieved 12 August 2012.
  6. ↑ "Gordon Brown admits 'big mistake' over banking crisis". The BBC. 11 April 2011. Retrieved 9 April 2013.
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