Abstract

This talk traces the growth of UK clearing bank mortgage lending since the 1970s. To offer mortgages, the clearing banks had first to forget the cardinal rule of banking and abandon their long-held aversion to maturity mismatching (borrowing short to lend long). During the 1960s the clearing banks were suffering under intense, restrictive monetary policy and losing market share to the finance houses and foreign banks. The Heath Government introduced Competition and Credit Control in 1971 partly to right those wrongs. It ended up unleashing an incredible growth in credit. The policy was abandoned after two years but not before it had fundamentally changed British banking – the clearing banks had shifted from asset management to liability management by bidding for wholesale funds on the money markets. Still hesitant to maturity mismatch domestically, in the 1970s the banks gained some familiarity with mismatching (‘maturity transformation’) in their international business. Stagnant growth, persistent inflation, and monetary control at home prevented them from expanding their domestic business, even as they were losing deposit market share. So when international business soured during the 1980s the clearing banks extended their mortgage lending in order to recapture retail deposits. This business proved popular and the clearing banks’ mortgage lending grew substantially during the 1980s. The demarcations between financial institutions continued to blur and, in time, clearing banks’ longstanding aversion to maturity mismatching faded into history.