The Secondary Banking Crisis, 1973-75: The Inside Story of Britain's Biggest Banking Upheaval

The Secondary Banking Crisis, 1973-75: The Inside Story of Britain's Biggest Banking Upheaval

Author: Reid, Margaret

Cost: $22.99



A crisis that brought the markets to the depths of despair, when the future of capitalism itself came to be doubted by many in Britain. Abundant credit in a liberalised financial system with a domestic economy led by government hell-bent on growth had provided a hot-house atmosphere for a breed of self-styled financial entrepreneurs. Often arriving from a background in property or stock market activity many of these players joined the ranks of the newly-established Secondary Banks. Their reign was brief, foundering in a volatile mix of political chaos, currency crises, rebounding interest rates, over-investment in property and the inevitable and dramatic change in that most fickle of ingredients – confidence. Thus the banking system as a whole was called into question and decisive action required from the Bank of England.


Banking, Crisis, Bank of England, Secondary Banks, Fringe banks, fringe banking, Property, Cedar, Jim Slater, Bentley, Pat Matthews, Jessel, Tom Whyte (Triumph), First National Finance, cycle


Reid's book is the definitive account of this crisis and crucial role of the Bank of England in diffusing it. Since it seems that periodic crises and mania are a fixture of the financial markets, if not human nature, it remains essential reading for bankers and investors both in the UK and overseas.

"The mid-1970s are now depicted, invariably in near-apocalyptic brushstrokes, as the time of Britain's most severe political, social and economic peacetime crisis since the immediate aftermath of the Napoleonic Wars, if not earlier. The oil shock, the three-day week, the Heath government brought down by the miners, the plunging stock market, the hyper-inflation, the IMF called in these well-known jolts to national pride all feature prominently on the lurid historical canvas. Yet one episode, arguably just as important and pregnant with possibilities as at least most of the others, has gone strangely missing from our collective memory: the secondary banking crisis. This welcome reprinting of Margaret Reid's meticulous, penetrating and deservedly classic account may do something to redress the situation." - from the introduction by David Kynaston


Introduction by David Kynaston iii

Preface ix



1 Action Stations at the Bank of England 3
2 The Lifeboat Launched 11



3 Developments in the Financial System, 1958-73 23
4 Debut of the Secondary Banks 34
Appendix: Section 123 Banking Concerns
at 30 September 1973 54
5 The Boom which Got Out of Hand 58
6 The Dash for Growth - and its Consequences 70



7 The Lifeboat Embarks on its Mission 89
8 The Property Crisis 102
9 The Lifeboat Idea Internationally 113
10 Crisis Climax and Turn of the Tide 120
11 Later Troubles and a Summing-up 138


Schedules I and 11 152
12 Case Study One: Keyser Ullmann 170
13 Case Study Two: Slater Walker 183
14 Appraisal and Conclusions 190

Abbreviations Used in Notes 201
Notes 203
Index 209
Chronology 221

Introduction to Margaret Reid's The Secondary Banking Crisis, 1973-5

The Secondary Banking Crisis

The mid-1970s are now depicted, invariably in near-apocalyptic brushstrokes, as the time of Britain's most severe political, social and economic peacetime crisis since the immediate aftermath of the Napoleonic Wars, if not earlier. The oil shock, the three-day week, the Heath government brought down by the miners, the plunging stock market, the hyper-inflation, the IMF called in - these well-known jolts to national pride all feature prominently on the lurid historical canvas. Yet one episode, arguably just as important and pregnant with possibilities as at least most of the others, has gone strangely missing from our collective memory: the secondary banking crisis. This welcome reprinting of Margaret Reid's meticulous, penetrating and deservedly classic account may do something to redress the situation.

The text that follows can safely be left to tell its own story. Indeed, to use this introduction to give a potted history of the crisis would be most unfair to Reid, who deliberately structures her book so that it gives something of the pleasure of a high-class thriller, though sadly without any cadavers. Nevertheless, historical knowledge seldom stands still, and it is worth mentioning three further accounts that have appeared since hers was first published in 1982. Each complements Reid's, without seeking to supersede it.

Michael Moran's The Politics of Banking (1984) is the work of an extremely intelligent and resourceful political scientist who sees in both the lead-up to the crisis (especially the Heath government's introduction of Competition and Credit Control in 1971) and the playing-out of the crisis itself a mixture of co-operation and conflict between central government on the one hand and key interest groups (such as the Bank of England and the City) on the other. Uncompromisingly academic, it is not a book for fainthearts, but undoubtedly adds an extra dimension. So too, in a quite different way, does Charles Gordon's The Cedar Story (1993), a narrative which, although concentrating mainly on Cedar Holdings among the secondary banks, also has larger ambitions. Writing with verve and no little elegance, if sometimes overegging the pudding, Gordon is at his best on the interplay of personalities and enjoys the benefit of close personal knowledge of some of them. As with Reid, the heroes of his story, and virtually beyond criticism, are the Bank of England's governor, Gordon Richardson, and deputy governor, Jasper Hollom.

The Secondary Banking Crisis

The other account is contained in my own A Club No More (2001), the final volume of a four-volume history of the City of London. Edwin Green, the archivist at HSBC, generously allowed me to see the Midland Bank's records concerning the crisis, and these eloquently convey the exasperation of one of the more circumspect of the 'Big Four' that felt it was having to pay a high (albeit unavoidable) price for the imprudence of its rivals, notably National Westminster and Barclays. They also include the minutes of some of the key meetings leading to the launch of the all-important 'Lifeboat' at the very end of 1973. Meanwhile, we continue to wait for the release of the Bank of England's records on the crisis. Happily, as any enterprising historian will be aware, they should be available shortly - though it would not be a complete surprise if some files were withheld on the grounds of containing information too sensitive about living people.

Of course, the secondary banking crisis was not the first time that the stability of the British financial system had been seriously threatened. In particular, many minds turned back to November 1890 and the Baring Crisis, which even more than the secondary banking crisis was enacted behind closed doors by a smallish group of senior and extremely anxious bankers. The story, which soon entered the City's myth kitty, can be briefly summarised. Baring Brothers, one of the City's largest and most prestigious merchant banks, had allowed itself to become badly over-committed in the Argentine. Having been kept in the dark by Barings until continuing concealment was no longer possible, the financial authorities rapidly made the estimate that the consequences of Barings being allowed to fail were potentially well-nigh catastrophic: not only would there be incalculable turmoil in the discount market, but the banking system itself might be threatened because of the sheer size of the firm's outstanding call loans. At this point the governor of the Bank of England, a tough-minded Scot called William Lidderdale, met the challenge. In the space of less than twenty-four hours, he set up and then pushed through a rescue fund to which, with varying degrees of enthusiasm, the City's other leading financial firms (including merchant and commercial banks) subscribed. This was, in effect, the original 'Lifeboat'. Barings lived to fight another day, having been taught a lesson that everyone assumed it would never forget.

The Secondary Banking Crisis

There was also a striking lesson to be drawn by comparison with events twenty-four years earlier. In May 1866 the powerful, apparently invincible house of Overend Gurney, which had traditionally been based in the discount market but was increasingly operating in other areas also, suddenly failed - or rather, was allowed to fail by the Bank of England, which did not lift a finger to save it. The unfortunate upshot was that many other firms, perfectly decent and otherwise solvent, were brought down in the ensuing sharp financial crisis; and this the Bank would duly remember when it came to shape its response in 1890. But there was also a significant social element to the two episodes. Whereas Barings was the supreme 'insider' house, having been close to the heart of the City establishment for almost a century by the time of its troubles, Overend Gurney had badly blotted its copying book in 1860 by using nakedly strong-arm tactics to try to force the Bank of England to reverse a recently initiated discounting policy.

Many more than six years would have needed to elapse for the Old Lady to have forgiven it. Indeed, it is arguable that social shibboleths were still obtaining in the 1970s, for although undoubtedly the Bank of England during the secondary banking crisis made most of its decisions on hard-headed business grounds, there persisted a sense (which Reid hints at rather than spells out) in which the secondary banks - and the very varied crew that led them - were instinctively divided into the more or less acceptable and the unquestionably beyond the pale.

In February 1995, to general amazement and consternation, the Bank of England found itself once again assembling the City's leading bankers (or at least, British bankers) in order to consider what to do about Barings. The world was about to hear more than it ever wanted to about a fugitive 'rogue trader' by the name of Nick Leeson; the bankers during that long week-end wrestled, largely unsuccessfully, with the alien concept of derivatives; and the Bank's steer, one amply justified by events, was that while the failure of Barings would be regrettable, this medium-sized merchant bank was relatively so much less powerful than in 1890 that such an outcome would not pose a systemic risk to the wider financial system. Despite reasonably whole-hearted efforts, no lifeboat was launched, and within days Baring had been acquired by the Dutch bank ING for less than a guinea. The governor of the Bank, Eddie George, took the opportunity to warn that the rules of 'moral hazard' still applied in the modern world, though how decisive such bracing considerations of pour encourager les autres really were remains unclear. Certainly there was little time for sententiousness some three and a half years later when, following the spectacular fall of Long-Term Capital Management after an equally spectacular rise, the New York Fed effectively corralled the heads of Goldman Sachs, JP Morgan and Merrill Lynch into taking over the huge - and hugely threatening - positions at LTCM. The ghost of Lidderdale would have nodded approvingly.

The Secondary Banking Crisis

What, in a London context, would happen now if a situation comparable to the secondary banking crisis were to recur? Since 1997 there has been a new regulatory dispensation, with the Bank of England's traditional functions largely taken over by the Financial Services Authority based in Canary Wharf. Unkind though it is, most observers would not quarrel with the description of the FSA as an institution mainly run by competent, uninspiring civil servants lacking not only intimate familiarity with the key players in the financial markets, but also the moral authority that, by virtue of the office as much as the individual, a Lidderdale or a Richardson was able to exercise. The City is of course far removed from the club-like character of the 1890s or even the 1970s, but the fact remains that in a serious crisis, endangering the stability of the financial system and perhaps the future of London as an international financial centre, someone would have to try to knock heads together.

My guess is that, in such a situation, that person would be not the head of the FSA but, yes, the poor old governor of the Bank of England - especially if he was a second-term governor, and therefore a major national and international figure. Time, as ever, will show the wiser.

It is a pleasure to have been asked to introduce this edition. On the one occasion I met her, towards the end of her life, Margaret Reid struck me as a charming lady. At the time of the secondary banking crisis, she was (having earlier been in the Treasury) writing about the City for the Financial Times, an unequalled vantage-point that in due course would give her book-length treatment a particular authority. By temperament she was probably happier working in weekly rather than daily financial journalism, and in 1980 she became financial editor of the Investors Chronicle. Following the acclaim justly given to her history of the secondary banking crisis, she wrote two more books: All-Change in the City (1988), a pioneering near-contemporaneous survey of 'Big Bang' and the accompanying City revolution; and Abbey National (1991), an account of that building society's conversion from mutual to plc. After her death at the age of sixty-seven, she was recalled by the eminent Treasury mandarin Sir Leo Pliatzky as someone who had bravely overcome a 'low quotient of self-confidence' to pursue 'an independent lifetime career in journalism' (Independent, 16 June 1992). Newsprint, however, is all too ephemeral, and the probability is that the book you are about to read will be Margaret Reid's permanent memorial.

David Kynaston
July 2003

Chronology of the Secondary Banking Crisis by Hindsight Books


The Secondary Banking Crisis

July Bank Rate at 5%.
With economy in doldrums despite tax cuts and increased public works. Rate falls further to what proved its low in January 1972.

August 15 Dollar made non-convertible to gold

September Competition and Credit Control (C and CC) scheme approved and launched

Removes ceiling on loans, reduces banks' liquidity requirements, and ends interest rate cartel. Subsequently broad money growth rises to above 25%, and by December 1973 M3 had risen a cumulative 73%. At that time total advances to UK residents had risen 2.5 times.
December 14 US dollar devalues against gold


Property price gains accelerate
Having risen 11% in 1971, capital values rise 24% in 1972.

March Expansionary Budget
Barber cuts revenue taxes, and makes allowances for depreciation to stimulate investment. Individuals able to offset interest above £35 against tax. Growth of 5% targeted.

April Keyser Ullman acquires Central and District Properties for £69m

May 1 Slater Walker stock hits peak of 412p.
Market capitalised the company at £220m.
19 FT Index peaks at high of 543.6
This level was not to be breached for another seven years during which time the market succumbed to inflationary fears, political and industrial turmoil and the combined problems in banking and property that constituted the secondary banking crisis.

June Sterling Crisis
Bank rate raised from 5% to 8%, the pound is floated.

October Minimum Lending Rate (MLR) replaces Bank Rate
Introduced to be a more market-responsive mechanism for controlling lending. MLR rises to 7.5% in October.

November Temporary freeze on commercial property rents.
Measure taken as part of Government's attempt to curb rising wages and inflation in general.

December MLR hits 9%
Subsequently declines in 1973, and is back, briefly, to 7.5% in June.


Property prices continue to surge
Capital values rise another 26% during 1973. By the middle of the year, the average price of new houses had risen by about a half over 12 months.

January 1 Britain joins the EEC

March Government budget - remains committed to growth
Public sector borrowing allowed to continue rise, economic growth target of 5% retained. Pressure for higher interest rates, but government provides bridging to hold building society rates below 10% in April.

April Slater Walker and Hill Samuel announce plan to merge

June O'Brien retires from Bank of England
To be replaced by Gordon Richardson.
Secondary bank shares prices down to well below peaks
Many of the well known secondary banking companies had seen share prices fall from earlier peaks by as much as 40-50%. Sentiment in the market had weakened with growing economic worries. Slater Walker merger with Hill Samuel called off.
Land Securities revalues property portfolio - 30% gain

July MLR rebounds sharply to 11.5%
Under pressure from deteriorating balance of payments and the currency markets. MLR is hiked twice - from 7.5% to 9%, and then to 11.5%. In practice this meant the rate to some borrowers from their banks was as high as 14%. Gilt-edged market and discount houses are hit hard.

September Town and City Properties buy Central and District for £97m

October 6 Yom Kippur War begins in Middle-East
Oil prices surge, rising four-fold before the end of the year.

November MLR goes to record 13%, bank liquidity tightened
A credit squeeze, rising oil prices, poor trade stats and industrial militancy contribute to a 29% fall in the stock market from November 14th to mid-December and similar drama in property through the winter, with values down 30-40% and practically no market for development sites. Meanwhile maturities shorten for lending to fringe banks and premium rates increase.
Land Securities revalue property again
An unprecedented second revaluation of the portfolio throws up another 25% surplus.
13 UK Government declares state of emergency to counter the effect of miners' overtime ban.

December 3 Trouble at London and County Securities Group
L&C had seen collapse in share price during November and had been unable to renew its money market deposits. It shares are suspended December 1st at 40p. FNFC heads consortium to support the group.
17 Government changes course - harsh mini-budget introduced
Plans to cut Government spending, raise surtax 10%, and restrict bank lending - 'The Corset'. Also plans to tax some property development profits.

19 Bank of England meets to rescue Cedar
Bank of England officials, Barclays, Cedar's institutional shareholders, and Kenneth Cork get together in marathon meeting to underwrite the Company's liabilities and enable it to keep its doors open. Its rescue announced next day, but shares suspended and other secondary bank stocks fall as much as a third in value.

21 Bank of England meets with clearers - Lifeboat concept launched
The Lifeboat committee meets for the first time on 28th December. By mid-January over £200m had been lent to shore-up depleted balance sheets (much of it at FNFC, where the exposure to property emerges as major problem) and more than 20 cases reviewed.


January Bovis taken over by P&O
Bovis, stretched by problems at subsidiary Twentieth Century Banking (which had suffered a run on deposits), is acquired for £25m. Also, Cornhill Consolidated fails, but Lifeboat does not intervene.
1 UK goes to 3-day working week
Miners and Rail workers on strike.

February UK General Election - Conservatives loss to Labour
New government's spring budget raises corporation tax.

April Lifeboat lending passes £400m

May Stern Property group collapses
Another property company, Lyon Holdings, also calls moratorium this month and soon goes into liquidation. Amidst the problems of the sector, the principle of 'Cork's Dam' is established to try to effect the orderly disposal of properties. (Institutional buying rises significantly through 1974 to 1978, absorbing greater supply.)

June Receivers called in to Guardian Properties
Follows limited help from Lifeboat after liquidity problems. Also, J.H. Vavasseur group restructured.
26 Herstatt Bank in Germany collapses

July Keyser Ullman joins Lifeboat
UDT also struggling and despite commitments from institutions, also joins lifeboat. UDT became the largest borrower from the Lifeboat, peaking at £500m.

August Lifeboat lending capped
Bank of England and clearers agree to limit support operation to £1.2bn.

September Edward Bates joins lifeboat
Following build up of its debts in the Eurodollar market - Bates is last to come aboard. Receiver appointed to Cannon Street Acceptances.

October 10 Second general election of the year
Confirms Labour Party's majority

November Triumph Investment Trust collapses. Jessel shares suspended
Jessel group hit by combined effect of rising interest rates on Insurance subsidiary portfolio and increased withdrawals.

29 Natwest shares fall to 88p
Chairman refutes rumours of Bank of England support to Natwest.

December 18 Government provides support to Crown Agents

31 Bank of England acts to rescue Burmah Oil


January 6 FT Index hits low of 146
Offering a yield of over 13% on the FT-30 stocks, this proved the low point of the bear market that had been in place since 1972.

24 FTSE rises 10.1%
Since the low point on the 6th, the market has rallied strongly, and finishes the month a fraction under 237.

February Burston Finance collapses

March Lifeboat commitments peak at £1.29bn.
Meanwhile some companies still allowed to go under including London and County Securities this month.

June Receivers called in to Northern Developments property company

August Barclays Bank acquires Mercantile Credit

November Bank of England begins support for Slater Walker Securities Bank
This and further action in regard to Slater Walker group was outside the Lifeboat operation in accordance with agreement in August 1974.

December Lifeboat lending down to nearly £900m
By the end of the year it was clear that demand on the Lifeboat for support lending was declining. At the end of 1976 it had fallen further to £783m. Some companies, such as Bowater, have left the Lifeboat as alternative funding becomes available. Trend becomes more pronounced in 1976.

Publisher: Hindsight Books Date Published: 2003 Available Formats: Softover (235pp., 5.5" x 8", 300g.) ISBN: 0954156722