Big Bang (financial markets)

For other uses, see Big Bang (disambiguation).

Bishopsgate in the City

The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to electronic, screen-based trading, enacted by the United Kingdom government in 1986. The day the London Stock Exchange's rules changed, 27 October 1986, was dubbed the "Big Bang" because of the increase in market activity expected from an aggregation of measures designed to precipitate a complete alteration in the structure of the market.

Policy

In the UK, Big Bang became one of the cornerstones of the Thatcher government's reform programme. Prior to these reforms, the once-dominant financial institutions of the City of London were failing to compete with foreign banking. While London was still a global centre of finance, it had been surpassed by New York, and was in danger of falling still further behind.

Thatcher's government claimed that the two problems behind the decline of London banking were overregulation and the dominance of elitist old boy networks and that the solution lay in the free market doctrines of unfettered competition and meritocracy.

Consequences

The effects of Big Bang were dramatic, with London's place as a financial capital decisively strengthened, to the point where it is arguably the world's most important financial centre even to the present day. The boom resulted in the relocation of institutions into new developments in the nearby Isle of Dogs area, particularly that of Canary Wharf.

Although the "Big Bang" eased stock market transactions there is a debate in the UK about how far it affected the later banking sector crisis. Some believe that deregulation of the banking sector by the incoming New Labour Government of 1997 contributed to the UK part of the 2007–2012 global financial crisis whereas most blame the Big Bang. Britain's Chancellor of the Exchequer at the time, Gordon Brown, reviewed his changes to banking regulation during The Institute for New Economic Thinking's annual conference in Bretton Woods New Hampshire in 2011:

"We know in retrospect what we missed. We set up the Financial Services Authority (FSA) believing that the problem would come from the failure of an individual institution," he said. "So we created a monitoring system which was looking at individual institutions. That was the big mistake. We didn't understand how risk was spread across the system, we didn't understand the entanglements of different institutions with the other and we didn't understand even though we talked about it just how global things were, including a shadow banking system as well as a banking system. That was our mistake, but I'm afraid it was a mistake made by just about everybody who was in the regulatory business."

BBC Article: Gordon Brown admits 'big mistake' over banking crisis.

Although the architect of Britain's banking deregulation in 1997 is clear that this was responsible for the loss of control of the banks, other commentators have linked the banking crisis to the Big Bang and the overall deregulation process. In 2010, the BBC Radio 4 current affairs programme, Analysis linked the Big Bang with the 2007–2012 global financial crisis.

Similar events

Subsequent similar actions, such as the deregulation of the Japanese financial markets in 2001, have analogously also been tagged with the phrase Big Bang.

See also

• The Wimbledon Effect

References

FT, staff (2006-10-29). "Revolution hailed but City warned of a looming fight for supremacy". In depth > Big Bang (Financial Times). Archived from the original on 15 November 2006. Retrieved 2006-10-29. 

Fortson, Danny (2006-10-29). "The day Big Bang blasted the old boys into oblivion (broken link)". The Independent. Retrieved 2006-10-29. 

Treanor, Jill (2006-10-27). "Revolution hailed but City warned of a looming fight for supremacy". The Guardian. Archived from the original on 4 November 2006. Retrieved 2006-10-29.