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