The collapse of SVB reminds us of the UK banking crisis of 1826. It could teach regulators how to fix the economy

A A bank failure wipes out the money available to its customers and freezes any capital that is already in circulation. depositors, borrowers and owners or shareholders all suffer the consequences, as macroeconomic activity and often the communities or business areas that the bank serves.

These issues may become more focused in the wake of regional or specialist banking collapse due to the exclusive reach of the failed institution. Silicon Valley Bank (SVB) is the second largest bank failure in US history, but its focus was specific, providing funding to start-ups, venture capitalists and technology firms.

This banking collapse reminds us of the failures of private banks that caused the financial crisis in England and Wales in the early 19th century. Although these banks differed from the SVB in terms of the scale and amount of finance provided, these institutions of the early 19th century served specific communities.

They also had a tendency to fail. And when they did, the impact on the regional economy was immense. Lines of credit for local businesses dried up and some struggled to survive.

Banking families were also adversely affected. For example, there was a failure of private banks owned by Henry Austen, brother of author Jane Austen. Harmful Effects on Financial Health of the wider Austen family. In the end Henry had to pay back £58,000 to his creditors, which would be around £6.5 million in today’s money.

After these failures, regulations were put in place with the aim of making these organizations more stable, with the aim of diversifying the way these organizations make money. It could provide some important lessons for regulators assessing the damage of the latest banking crisis.

Following the financial crisis of 1825–1826 new laws were passed in 1826 claiming the “belonging” of the country.within 24 hours of barter, In other words, the financial system was close to collapse – without access to money, people would only have to exchange goods.

The crisis saw the failure of 93 private banks across England and Wales. about 15% of the total market,

Our research in this area shows that the causes of the crisis were complex. But the result was a loss of widespread confidence in private banks. These were small-scale, individually owned banks, with a maximum of six partners or owners. This meant that these banks drew from a limited pool of capital to lend to their customers and held only small amounts of reserves.

like Austen, people who ran private banks were usually privately wealthy rather than engaged in local construction. There was also no central bank and no national regulator of financial services to keep these organizations on the straight and narrow.

radical banking rules

This crisis and the resulting push to reform the banking system led to legislation that was revolutionary for its time: 1826 Bank Act, These new laws created the first wave of “joint stock” retail banks in England and Wales, 138 formed between 1826 and 1844. These organizations were allowed to issue shares, giving them wider access to capital from more diverse sources.

The new banks were also run by professional managers and their directors were usually members of the local business community. it meant they had a vested interest Providing Successful Banking Services for the local economy.

two prospectuses We found in the archives of HSBC Group Show how these banks recognized the impact of the recent financial turmoil on these sectors. The 1829 prospectus of the York City and County Bank declared:

It is impossible to describe the accumulated misery of those failures on thousands of families and individuals.

An 1827 brochure for the Huddersfield Banking Company stated:

This district has not only suffered from the evils arising from the general suspension of demand, which is common to all manufacturing districts, but has suffered an additional local evil in the failure of five banking establishments.

The Act of 1826 led the government to recognize that a more stable banking system was desirable for the public good. And since shares in joint stock banks could also be purchased by members of the public, these were public institutions. In fact, our research shows that shares were Mainly held by local investors,

This so-called “patient capital” (or long-term investment) was provided by committed local individuals. This was quite different from previous private banks, which were run by a few individuals. Unsurprisingly, the reforms were opposed by both private bankers and the Bank of England, but were nevertheless passed by Parliament.

help the local economy

The new banks were motivated to gain local and regional advantage through the provision of successful, stable and profitable banking services. Most survived until the late 19th century, when they were absorbed and became branches of the “Big Five” banks that emerged in the early 20th century: Lloyd’s, Barclays, National Provincial, Westminster Bank and the Midland Bank. some of these branches remain on UK high streets to this day,

The private banks of the early 19th century were very different from the SVB. They were smaller in scale, less global, less technologically advanced and operated in a less regulated economic system. But the devastating regional impact of their failure is comparable, certainly in terms of impact on individuals and businesses.

As we know from the global financial crisis of 2008, the shock of a bank failure is both immediate and long-lasting. Such a situation led to fairly radical solutions in 1826 – essentially restructuring UK banking services – and again after the 2008 crisis.

economist Joseph Stiglitz is among the callers Again for new legislation or regulations in the wake of the collapse of the SVB. As in England and Wales in 1826, the personal cost of bank failure is severe and governments must take steps to avoid such consequences.

Lucy Newton, Professor in Business History, Henley Business School, University of Reading

Victoria Barnes, Reader in Commercial Law, Brunel University London

This article was originally published at The Conversation. To read the original article, click Here,

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