This Time is Different: Causes and Consequences of British Banking Instability over the Long Run

This paper addresses three questions: (1) How severe were the episodes of banking instability<br/>experienced by the UK over the past two centuries? (2) What have been the macroeconomic<br/>indicators of UK banking instability? and (3) What have been the consequences of UK banking<br/>instability for the cost of credit? Using a unique dataset of bank share prices from 1830 to 2010<br/>to assess the stability of the UK banking system, we find that banking instability has grown more<br/>severe since the 1970s. We also find that interest rates, inflation, lending growth, and equity<br/>prices are consistent macroeconomic indicators of UK banking instability over the long run.<br/>Furthermore, utilising a unique dataset of corporate-bond yields for the period 1860 to 2010, we<br/>find that there is a significant long-run relationship between banking instability and the creditrisk<br/>premium faced by businesses.<br/>