Using the perspective developed in my earlier work on the evolution of banking, the main factors that have brought UK banks to their present position can be identified. Banking has from the beginning balanced the conflicting forces of profitability and safety: Lending has always entailed the acceptance of greater risk and lower liquidity for the banks, while increasing profitability if all goes well. Looking all the way back to the emergence of bank money as the means of payment we can come to some conclusions about what the main factors have been which have brought us to the present situation. Under competitive pressure unleashed by Competition and Credit Control, the liquidity cushion was run down. Securitisation began in the UK as a solution to the lack of liquidity. It was the step which allowed banks to mutate into a shape that eventually became monstrous. This process was given a huge boost by the Basel I capital accord and the Big Bang. The third factor was the speed with which banks developed the later innovations and used these to expand their balance sheets far too rapidly. The early history of banking is particularly instructive on this matter of speed.
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