Hollow et al (eds ) complexity and crisis in the financial system; critical perspectives on the evolution of american and british banking (2016)

Complexity and Crisis in the Financial
System


.


Complexity and Crisis
in the Financial
System
Critical Perspectives on the Evolution of
American and British Banking

Edited by

Matthew Hollow
University of York, UK 

Folarin Akinbami
Durham University, UK

Ranald Michie
Durham University, UK

Cheltenham, UK • Northampton, MA, USA


© Matthew Hollow, Folarin Akinbami and Ranald Michie 2016
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior

permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA

A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2015945475
This book is available electronically in
Business subject collection
DOI 10.4337/9781783471331

ISBN 978 1 78347 132 4 (cased)
ISBN 978 1 78347 133 1 (eBook)

06

Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

Contents
List of figuresvii
List of tablesviii
List of contributorsix
Acknowledgementsxv
Introduction: rethinking the crises–complexity nexus
Matthew Hollow

1

PART I  COMPLEXITY AND CRISES IN FINANCIAL SYSTEMS
  1.Financial innovation and the consequences of complexity:
insights from major US banking crises

Robert F. Bruner, Sean D. Carr and Asif Mehedi

13

  2.Entrepreneurial failure and economic crisis: a historical
perspective36

Mark Casson
  3. Nature or nurture: the British financial system since 1688

Ranald Michie

60

  4. The British banking population: 1790–1982

Ian Bond

85

PART II 
LEGISLATIVE AND STRUCTURAL CHANGES IN
THE FINANCIAL SECTOR
  5. From tort to finance: Delaware’s sedative duty to monitor

Dalia Tsuk Mitchell

121

  6.Demutualization and risk: the rise and fall of the British
building society

Andrew Campbell and Judith M. Dahlgreen

149

  7.Directors in the dock: joint-­stock banks and the criminal law
in nineteenth-­century Britain

James Taylor

164

v

vi

Complexity and crisis in the financial system

  8.UK corporate law and corporate governance before 1914: a
re-­interpretation

James Foreman-­Peck and Leslie Hannah

183

  9.Effective risk management and improved corporate
governance214

Roman Tomasic and Folarin Akinbami
PART III 
MANAGING AND REGULATING COMPLEX
FINANCIAL SYSTEMS
10.The historical development of the US government’s responses
to economic and financial crises

Peter H. Bent
11.From the mid ­nineteenth-­century bank failures in the UK to
the twenty-­first-­century Financial Policy Committee:
changing views of responsibility for systemic stability

T.T. Arvind, Joanna Gray and Sarah Wilson
12.Financial reporting, banking and financial crisis: past, present
and future

Mark Billings
13. Financial crises and disaster management

John Singleton

243

261

287
306

Index329


Figures
  1.1 US banking crises, bank assets and GDP growth, 1834–2013
16
  3.1 The number of UK banks, 1559–2008
63
  3.2The number of UK banks/nominal value of UK national
debt, 1750–1850
65
  3.3 The number of US banks, 1782–2013
75
  4.1 British banking population: active firms, 1790–1982
99
  4.2 British banking population: new firms, 1790–1982
99
  4.3 British banking population: exits by merger, 1790–1982

100
  4.4British banking population: exits by failure and closure,
1790–1982100
  4.5 Country banks, 1800–1842
104
13.1 Revised Disaster Management Cycle
310

vii


Tables
1.1Case studies – innovations in financial instruments,
institutions and markets
2.1 Crises originating in or impacting upon the UK, 1600–2007
2.2Simple typology of the normal state of the economy and a
crisis-­prone state
4.1Other banking population estimates, 1844–1884 (England and
Wales only)
4.2Other banking population estimates, 1884–1924 (England and
Wales only)

viii

32
41
53
105
106

Contributors
Folarin Akinbami joined J.P. Morgan as an Associate in February 2015.
Prior to this, he was Lecturer in Commercial Law at Durham University,
where he taught and researched Financial Regulation and Corporate
Governance. He was seconded to the Law Commission of England and
Wales, as Team Lawyer, between October 2013 and June 2014, where he
worked on the Fiduciary Duties of Investment Intermediaries project.
Prior to his appointment as a lecturer, he was a Post-­Doctoral Research
Associate in Durham Law School and the Institute of Hazard, Risk
and Resilience (IHRR) at Durham University. The research in this book
was carried out while he was at Durham University and he is pleased to
have worked on the Leverhulme Trust-­funded ‘Tipping Points’ project at
Durham. He is also pleased to have co-­authored a number of articles and
chapters with Professor Roman Tomasic.
T.T. Arvind is Professor of Law at Newcastle Law School, having entered
academia after several years as a commercial practitioner. He has published extensively in the areas of legal history and private law. His recent
work has explored the connections and boundaries between the worlds
of common law and regulatory action. He is the author of The Law of
Obligations: A New Realist Approach (in press), and the joint-­editor, with
Jenny Steele, of Tort Law and the Legislature: Common Law, Statute and
the Dynamics of Legal Change (Hart, 2013). He was awarded the ICLQ
Young Scholar Prize in 2010 and the Society of Legal Scholars Best Paper
Prize in 2009.
Peter H. Bent is a Marie Curie Early Stage Research Fellow in the
Department of Economics at the University of Oxford and a PhD
student in economics at the University of Massachusetts, Amherst. Before
beginning his doctoral studies, he earned an MSc in Economic History
(Research) at the London School of Economics and an MA in Economics
at the University of New Hampshire. His current research focuses on the

role that international capital flows played in financial crises during the
classical gold standard era.
Mark Billings is Senior Lecturer in Accounting and Business History at
the University of Exeter Business School. He has previously held various
ix


x

Complexity and crisis in the financial system

administrative and financial management positions in investment banking
and business, and academic posts at the City University Business School,
London, Sheffield Hallam University and Nottingham University Business
School. He is a graduate in economics and holder of an MSc in Financial
Management from the Universities of Sheffield and London, respectively,
and has been a member of the Institute of Chartered Accountants in
England and Wales since 1985. His research interests are in banking,
financial and accounting history and financial reporting, and he currently
teaches undergraduate courses on corporate governance and auditing.
Ian Bond worked as an economist at the Bank of England for over 30
years. His career included work on monetary policy (in particular as Head
of the Structural Economic Analysis Division and as a member of the
Monetary Policy Committee secretariat), but was mainly devoted to financial stability and prudential policy issues – latterly as Head of the Financial
Resilience Division, a role which included responsibility for the  Bank’s
payment systems oversight function and for the development of the Bank’s
approach to the management of financial crises. Since his retirement from
the Bank, he has been undertaking research on the patterns of bank failure
in the UK since the end of the eighteenth century and on the structural
and legislative changes associated with that experience. He was a member

of the Advisory Council for the ‘Tipping Points’ project at the IHHR in
Durham.
Robert F. Bruner is University Professor, Distinguished Professor of
Business Administration, and Dean Emeritus of the University of
Virginia’s Darden School of Business. A faculty member since 1982 and
winner of leading teaching awards at the University of Virginia and
within the Commonwealth of Virginia, he teaches and conducts research
in finance and management. As a financial economist, Bruner is best
known for his research on mergers and acquisitions, corporate finance
and financial panics. His books, Deals from Hell and Applied Mergers and
Acquisitions, have helped numerous practitioners and students toward successful transactions. The Panic of 1907: Lessons Learned from the Market’s
Perfect Storm, his book with Sean D. Carr, attracted wide attention for
its discussion of the underpinnings of financial crises. Bruner received a
BA from Yale University and his MBA and DBA degrees from Harvard
University.
Andrew Campbell is the holder of the Chair of International Banking
and Finance Law at the University of Leeds, UK. He is a Solicitor of the
Supreme Court of England and Wales and a Chartered Banker. He has
written extensively on international banking law and regulatory issues




Contributors­xi

and is a member of the Advisory Panel of the International Association
of Deposit Insurers. He regularly acts as Consulting Counsel to the
International Monetary Fund, Washington, DC and has advised governments and drafted banking laws for a number of countries.
Sean D. Carr is an Assistant Professor of Business Administration at the
University of Virginia’s Darden School of Business and the Executive

Director of the Batten Institute for Entrepreneurship and Innovation. His
applied research, which has examined entrepreneurial dynamics, social networks, venture capital and financial crises, has resulted in award-­winning
books, articles, case studies, digital media and numerous teaching materials. His work has been cited by The New York Times, The Wall Street
Journal, the Financial Times, Newsweek, NPR and CNBC. He is the co-­
author of The Panic of 1907: Lessons Learned from the Market’s Perfect
Storm, with Robert F. Bruner. Previously, Carr spent nearly ten years as
a broadcast journalist with ABC News and CNN. He has earned both a
PhD in Management and an MBA from the University of Virginia; an
MSc from Columbia University; and a BA from Northwestern University.
Mark Casson is Professor of Economics at the University of Reading and
Director of the Centre for Institutional Performance. His recent publications include The Entrepreneur in History (with Catherine Casson, Palgrave
Pivot, 2013) and Large Databases in Economic History (co-­edited with
Nigar Hashimzade, Routledge, 2013). He has also edited two recent reference works on The History of Entrepreneurship (with Catherine Casson,
Edward Elgar, 2013) and Markets and Market Institutions (Edward Elgar,
2011).
Judith M. Dahlgreen qualified as a Solicitor of the Supreme Court of
England and Wales in 1988 and practised in England and Scotland in
private practice and in the energy sector until 2001. She obtained an LLM
from the University of Leeds in 2004 and has been a lecturer there ever
since. Her academic interests are in banking law, the law on retail financial
services in the UK and Europe, and insolvency law. She teaches banking
law and company law to undergraduates and capital markets law to postgraduates and she supervises PhD candidates in areas relating to insolvency law, banking law and the law on financial services. She is a member
of the Centre for Business Law and Practice in the School of Law at the
University of Leeds.
James Foreman-­Peck is the Director of Cardiff University’s Welsh Institute
for Research in Economics and Development and former President of the
European Historical Economics Society. He has been Economic Adviser at
HM Treasury concerned with micro-­economic policy issues, particularly

xii

Complexity and crisis in the financial system

public service delivery and procurement. Previous posts include Professor of
Economic History at the University of Hull, Visiting Associate Professor of
Economics at the University of California, Davis and Fellow of St Antony’s
College, University of Oxford. His books include A History of the World
Economy: International Economic Relations since 1850, Public and Private
Ownership of British Industry 1820–1990 (with R. Millward, Financial
Times/Prentice Hall, 1994) and, most recently, European Industrial Policy:
The Twentieth Century Experience (edited with G. Federico, OUP, 1999).
Joanna Gray is Professor of Financial Law and Regulation at Birmingham
Law School. She has taught and supervised students at leading universities
and has conducted training for clients in the legal, banking and finance
sectors, the IMF, the Reserve Bank of India, the Turkish Capital Markets
Board and the Moroccan Capital Markets Board. She is the author of
Implementing Financial Regulation: Theory and Practice (Wiley Finance,
2006). She co-­edited Financial Regulation in Crisis: The Role of Law
and the Failure of Northern Rock (Edward Elgar Financial Law Series,
2011) and is currently co-­editing a research handbook entitled State Aid
in the Banking Sector (with Francesco De Cecco and François-­Charles
Laprévote) as part of the Edward Elgar Research Handbooks in Financial
Law series. She has written extensively for academic and practitioner journals such as the Journal of Corporate Law Studies, Capital Markets Law
Journal and the Journal of Financial Regulation and Compliance.
Leslie Hannah is Honorary Distinguished Professor at Cardiff Business
School. He has previously taught at Oxford, Essex, Cambridge, LSE,
Harvard, Tokyo and Hitotsubashi and was Dean of the Cass Business
School and Chief Executive of Ashridge Management College. He has
published extensively on the rise of the corporate economy, the electric

utility industry, pension funds and internationally comparative business
history. His latest article is ‘A global corporate census: publicly-­quoted and
close companies in 1910’, Economic History Review, May 2015.
Matthew Hollow is an Associate Lecturer in the York Management School
(UK). He holds a PhD (DPhil) in Modern History from Oxford University
and has previously worked as a Research Associate on the Leverhulme
Trust-­funded ‘Tipping Points’ project at Durham University. Research-­
wise, his main interests include: the history of commercial crime, risk and
risk management, business ethics and shadow banking. His most recent
book is entitled Rogue Banking: A History of Financial Fraud in Interwar
Britain (2014).
Asif Mehedi is a Research Associate at the Batten Institute for
Entrepreneurship and Innovation in the University of Virginia’s Darden




Contributors­xiii

School of Business. His research interests include complex social systems,
financial crisis and entrepreneurship. Mehedi is a native of Dhaka,
Bangladesh, where he worked in development finance. He has also worked
on a development project to build the capacities of local small businesses.
In this role, he partnered with industry associations and promising entrepreneurs to design and execute growth initiatives with both social and economic objectives. Mehedi received a BBA from the University of Dhaka
and an MBA from the University of Virginia.
Dalia Tsuk Mitchell is a Professor of Law at The George Washington
University. Her writings focus on the history of US legal and political
thought. Her book, Architect of Justice: Felix S. Cohen and the Founding
of American Legal Pluralism (Cornell University Press, 2007), won the
2007 American Historical Association’s Littleton-­Griswold Prize for the

best book in any subject on the history of American law and society. Her
current work explores the relationship between corporate law and theory
and the development of the modern American state. Representative articles include ‘Legitimating Power: The Changing Status of the Board of
Directors’ (2011), ‘The End of Corporate Law’ (2009), ‘Status Bound: The
Twentieth Century Evolution of Directors Liability’ (2009), ‘Shareholders
as Proxies: The Contours of Shareholder Democracy’ (2006), ‘From
Pluralism to Individualism: Berle & Means and 20th Century American
Legal Thought’ (2005) and ‘Corporations without Labor: The Politics of
Progressive Corporate Law’ (2003).
Ranald Michie is Emeritus Professor of History at the University of
Durham. He is a recognized expert in the field of financial history, having
produced numerous books and articles over a long career. Among the most
notable of his books are: The London Stock Exchange: A History (1999)
and The Global Securities Market: A History (2006), both published by
Oxford University Press. More recently, he has been working on British
banking history as part of the Leverhulme Trust-­funded ‘Tipping Points’
project.
John Singleton is Professor of Economic and Business History at Sheffield
Hallam University. He obtained his PhD from the University of Lancaster
in 1986. Much of his early research, including Lancashire on the Scrapheap
(OUP, 1991) concerned the history of the cotton industry in the mid
twentieth century. Between 1993 and 2010, he taught in New Zealand and
published extensively on aspects of New Zealand economic and financial
history, including Innovation and Independence: The Reserve Bank of New
Zealand, 1973–2002 (Auckland University Press, 2006), of which he is
principal author. His most recent book is Central Banking in the Twentieth


xiv

Complexity and crisis in the financial system

Century (CUP, 2011). At present, he is working on a comparative history
of disasters since 1900 which will be published by Edward Elgar.
James Taylor is a Senior Lecturer in History at Lancaster University. He
received his PhD from the University of Kent in 2003. He has written widely
on the development of the corporate economy in Britain since 1720, particularly from cultural and legal perspectives. His articles have appeared in
leading historical journals and his first two books received prizes from the
Economic History Society (Creating Capitalism, Royal Historical Society,
2014) and the Business History Conference (Shareholder Democracies, co-­
authored with Mark Freeman and Robin Pearson, University of Chicago
Press, 2012). His third book is Boardroom Scandal: The Criminalization of
Company Fraud in Nineteenth-­Century Britain (OUP, 2013).
Roman Tomasic  is an international corporate law scholar based in
Australia. He was Chair of Corporate Law at the Durham Law School in
the UK from 2007 until 2012. He remains a Visiting Professor of Company
Law at Durham University and is currently employed as Professor of Law
in the School of Law at the University of South Australia in Adelaide. He
has also served as Visiting Professor in law schools in Hong Kong, Malaysia
and China. Tomasic was a founding editor of the Australian Journal of
Corporate Law and has a strong interest in comparative company law. He
has used empirical research methods in the study of corporate law and
corporate governance both  in Australia and East Asia. He is pleased to
have worked on the Leverhulme Trust-­funded ‘Tipping Points’ project and
co-­authored a number of articles and chapters with Dr Folarin Akinbami.
He is also a former Chair of the Australasian Law Teachers Association.
Sarah Wilson is Senior Lecturer in Law at York Law School, UK. She
read law at Cardiff Law School before studying Modern British History,
gaining a MA (History) and PhD (History). She has held a number of
posts in UK law schools. Her recent publications in the sphere of financial

crime and financial/banking law and regulation include The Origins of
Modern Financial Crime: Historical Foundations and Current Problems
in Britain (Routledge, 2014), a monograph providing a multi-­disciplinary
analysis of financial crime from c. 1830 to the present. Sarah has recently
published ‘The new Market Abuse Regulation and Directive on Criminal
Sanctions for Market Abuse: European capital markets law and new global
trends in financial crime enforcement’ in the Journal of the Academy of
European Law. She is a longstanding contributor to Lloyds Law Reports
Financial Crime and has helped to shape its new International Section.


Acknowledgements
First and foremost, sincerest acknowledgments need to be given to all the
scholars and experts who have contributed chapters to this edited volume.
The quality and rigour of the contributions they have produced has been
truly exceptional and the richness of the book you see before you is entirely
down to their hard work and commitment to this project.
Second, we would like to thank the editorial team at Edward Elgar (particularly Katy Roper, Fran O’Sullivan and Aisha Bushby) and acknowledge the help and assistance they have provided. In addition, we would like
to acknowledge the invaluable copy-­editing and proofreading work done
by Krysia Johnson to get this volume into shape.
Finally, from a personal perspective, the editorial team would also like
to acknowledge the financial support that was provided by the Leverhulme
Trust to the ‘Tipping Points’ initiative at the Institute of Hazard, Risk and
Resilience (IHRR) at Durham University. It was thanks to the funding
provided by this project that we were all able to branch out from our own
respective disciplines and engage in truly interdisciplinary dialogue – thus,
sowing the seeds for the volume you see before you.

xv

Introduction: rethinking the
crises–complexity nexus
Matthew Hollow
Crisis and complexity – since the turmoil of 2007–8, these two terms seem
to have been twinned together by economists, financial commentators and
academics on an increasingly frequent basis (Caballero and Simsek, 2009;
Christophers, 2009). Indeed, so common has this conceptual coupling
become that one is now almost surprised to find an article or opinion
piece about the financial crisis of 2007–8 that does not mention the word
‘complexity’ at least once in its analysis of the events leading up to the
crash.
Of course, it is worth pointing out that the financial crisis of 2007–08
is far from the first financial crisis to be described in this way. Countless
other crises – ranging from the Asian Crisis of the late 1990s to the 1929
Wall Street Crash – have also been (and continue to be) categorized as
‘complex’ events by many learned commentators (Kindleberger, 2000).
Indeed, as far back as 1873, one can find commentators such as the influential British journalist Walter Bagehot using such terms to describe these
periodic episodes of financial upheaval (Bagehot, 1910).
What is notable about this most recent crisis, however, is the degree to
which the events that unfolded have not only been described through the
lens of complexity, but also the extent to which they have been attributed to complex processes (Blackburn, 2008; Davies and McGoey, 2012;
Leyshon and Thrift, 2007). Perhaps unsurprisingly, this tendency to blame
the 2007–8 crisis on increased levels of complexity in the financial system
has been particularly pronounced in journalistic circles, where it seems
that it is now almost standard practice to preface any article or opinion
piece on the crisis with some sort of (usually disparaging) comment
about the ‘bizarreness’ or ‘indecipherability’ of modern financial markets
(Christophers, 2009). Typical examples in this respect include the Financial

Times columnist, John Gapper, who has written how the ‘bizarre degree of
complexity in financial markets was bound to lead to trouble’,1 or the New
York-­based financial commentator, Lee C. Buchheit, who in the aftermath of the crisis suggested that: ‘We have reached the point where some
1


2

Complexity and crisis in the financial system

financial engineers have managed to baffle even themselves. Along the
way, though, they seemed to have befuddled their boards of directors, risk
management committees, lawyers, accountants, customers and ­regulators’
(Buchheit, 2008, p. 24).
In a similar but slightly different vein, there has also been a growing
number of calls for economists and financial regulators to pay more attention to the ideas and methods of complex system theorists (Duit and
Galaz, 2008; Gilpin and Murphy, 2008). Underpinning such calls is a belief
that, in today’s increasingly interconnected financial market, such tools
will not only allow governments and regulators to make better-­informed
decisions, but will also hopefully help them better understand the potential (unintended) consequences of their actions (Goldin and Vogel, 2010;
Haldane, 2009; May, Levin and Sugihara, 2008).
Given this strong and pervasive interest in issues of this sort, we felt that
it was both timely and necessary to produce a text that would not only
provide a more in-­depth assessment of the relationship between financial
crises and complexity levels in financial systems, but would also critically
interrogate the way in which these sorts of terms have been used by scholars and financial commentators in recent years. Although we did toy with
the idea of producing a text written from a global perspective, we eventually decided to narrow the geographical focus of this book down to the US
and UK financial markets. The rationale for this US–UK geographical
focus was as follows: first, New York and London have, historically, been
the two most important financial centres in the global economy (Ferguson,

2001); and, second, the origins of the current global financial crisis can
most obviously be linked back to developments in the financial sectors of
these two countries (Casey, 2011).
We also decided that, if we wanted to fully probe the nature of the
relationship between crises and complexity in the US and UK financial
markets, we would need to try to break free of traditional disciplinary
boundaries and look at these issues from a wider and more holistic perspective. To achieve this goal, we consciously brought together as wide
a range of academics as we could from across the disciplines of law,
history, economics and business – each with their own unique perspectives on the events of 2007–8 and the evolution of the US and UK financial systems more generally. Together, they have helped us to produce a
book that is not only remarkably wide ranging, but – as the following
summary demonstrates – also truly interdisciplinary in both its scope
and content.




Introduction­3

PART I: COMPLEXITY AND CRISES IN FINANCIAL
SYSTEMS
As many readers of this volume will no doubt be aware, in the last few
years there has been an extraordinarily wide variety of (often contradicting) explanations put forward to explain the global financial crisis
of 2007–8 (see Jickling, 2009; Lo, 2012; Pinnuck, 2012). From a critical
perspective, however, one thing that has tended to be lacking in most of
these accounts is any real sense of historical or longer-­term perspective
regarding the events of 2007–8 (Daunton, 2011; Hsu, 2013). This has been
problematic not only in the sense that it has made it hard for readers to get
any real sense of the historical significance of this most recent crisis, but
also in the fact that it has made it that much harder to accurately compare
and contrast this crisis with previous ones (Kobrak and Wilkins, 2011).

Tackling this continued lack of historical insight into the events of 2007–8
is one of the underlying goals of the first chapter in this edited volume,
written by Bruner, Carr and Mehedi. Unlike most contemporary accounts,
their contribution does not just focus on the immediate short-­term causes of
the crisis of 2007–8, but rather tries to understand the longer-­term dynamics
and forces that have contributed to the seemingly timeless cycle of crashes,
panics and crises in the US banking sector. At the heart of their argument
is something that they call the ‘Innovation–Complexity hypothesis’. In
simplified terms, this hypothesis posits that, under certain conditions, the
introduction of new innovations to the financial sector can increase the
likelihood of crises occurring by amplifying complexity levels in financial
markets. To test the validity of this thesis, they provide six micro-­case studies
of previous banking crises in the US – revealing how financial innovation of
one form or another has been present during each episode. Based on these
findings, they conclude that, whilst innovation by itself may not always
cause crises, it does tend to heighten complexity and uncertainty in financial
markets (which, in turn, increases the risk of crises occurring).
Building on this theme of innovation and crises is Casson’s entry on
entrepreneurial failure and economic crises in the UK. Like Bruner, Carr
and Mehedi, Casson adopts a long-­term historical perspective in his work,
going back as far as the Tulip Mania of the seventeenth century in order to
understand the underlying trends and patterns at work in the UK market.
Amongst the key issues that he sets out to investigate is the question of
why market participants behave as they do both during and in the build-­up
to economic crises. To achieve this goal, he adopts a novel approach based
upon applying theories of entrepreneurship to a range of quantitative and
qualitative sources. Ultimately, what this approach demonstrates is that –
contrary to much perceived economic wisdom – the origins of economic

4

Complexity and crisis in the financial system

crises can often be traced back to real economic factors (most notably poor
investment choices and overvaluations of new innovations).
Similarly long-­term in its approach to the crisis of 2007–8 is Michie’s
chapter, which provides the third entry in this first section. The primary
focus of Michie’s chapter is on the changing demographics of the UK and,
to a lesser extent, US financial systems over the course of the modern and
early modern eras. To measure these changes, Michie utilizes a series of
newly created databases that chart the total number of UK banks, building societies and savings banks on an annual basis, as well as a number
of pre-­existing datasets on the US financial sector, to produce a series of
population timelines. What Michie concludes from these results is that,
like most complex ecosystems, financial markets are inherently fragile entities that can be hugely (and often negatively) affected by external stimuli.
Leading on from this finding, he also suggests that governments and regulators ought to give more thought to the impact that their regulations and
­legislations have upon the dynamics of these financial ecosystems.
Complementing Michie’s demographic investigation is the following
entry by Bond. Like Michie, Bond’s interest is in the long-­term evolution
of the British banking sector and, in particular, the manner in which its
population has changed over time. In order to assess these changes, Bond
has developed a new and – compared with previous efforts – much more
comprehensive database that not only tracks the total numbers of banks in
the UK, but also the annual entries and exits from the market. Thanks to
such robust data, he is able to draw out the key characteristics of different
eras in British banking history and identify the long-­term processes that
have shaped – and continue to shape – the UK banking sector.

PART II: LEGISLATIVE AND STRUCTURAL
CHANGES IN THE FINANCIAL SECTOR

Alongside the question of who exactly was to blame, one of the subjects
that continues to feature heavily in discussions about the financial crisis –
particularly in the popular press – is the issue of why so few of those
involved in the catastrophic events of 2007–8 have faced any form of criminal prosecution or legal sanction (Rakoff, 2014). Central to these debates
has been a general sense of unease about the current state of financial
regulation, with many taking the current lack of convictions as a sign of
impotence on the part of lawmakers in the US and the UK: ‘Despite the
financial crisis and the spate of mis-­selling scandals, we still have not seen
anybody sent to jail. Is that because nobody ought to go to jail, or because
there is a fundamental failure in the sanctions regime or the legal system?’2




Introduction­5

The result of this increased focus on the level of shady behaviour in the
US and UK financial markets has been an upsurge of interest – both academic and popular – in questions relating to the role and value of financial
regulation (Goodhart, 2008; Moloney and Hill, 2012). Particularly apparent in this respect has been the increased level of interest that has started
to be shown in the historical roots of the regulatory frameworks that were
in place in the US and the UK at the time of the crisis, and whether or
not there was anything notable that changed in the years prior to 2007–8
(Wilson and Wilson, 2013).
This second section of the book provides a welcome complement to
this burgeoning body of work by offering up a series of readings on the
various legal and legislatives changes that have taken place in the US and
UK financial sectors over the past two centuries. Amongst the key questions that it asks are: have legislative changes had any impact upon the
stability and security of the US and UK financial systems? Why were there
more prosecutions for fraud and financial crime in the past? Are modern
(complex) financial systems inherently harder to regulate?

The first chapter to deal with these fundamental issues of power and
control is Mitchell’s insightful analysis of the changes that have taken place
in US corporate law (particularly with respect to notions of directors’
duties) since the late nineteenth century. To investigate these changes, she
focuses on a number of landmark US cases – including Briggs v. Spaulding
(1891), Graham v. Allis-­Chalmers Mfg Co. (1963) and In re Caremark
International (1996) – each of which reveals something about the changing
role of the corporation in the US in modern times. Ultimately, what she
concludes is that, although in recent years the US courts may have adopted
a rhetoric of care and responsibility (primarily to reassure shareholders
about the competency of their executives), what has really been happening
is a gradual erosion of corporate liability and responsibility in favour of a
greater emphasis on unrestrained free-­market growth.
Another chapter that critically engages with the raft of free-­market
reforms that have been passed in the UK and the US since the 1980s is the
following entry by Campbell and Dahlgreen, which focuses on the history
of the building society movement in England and the legislative changes
that have shaped its structure since the nineteenth century. Conceptually,
the authors’ main goal is to try to understand why and how so many building societies opted to demutualize during the late twentieth century and
what impact this has had on the stability of the UK financial sector. In the
end, what they suggest is that, whilst the original concept of the permanent
building society may have been somewhat outdated by the 1980s, the basic
idea of providing working-­class savers with a safe and protected place to
deposit their earnings still remains as relevant as ever.


6

Complexity and crisis in the financial system

The next chapter by Taylor then shifts the debate somewhat by considering the role that the criminal law (and the threat of criminal sanctions)
played in regulating the UK financial sector during the nineteenth century.
As Taylor himself points out, this is an area that has generally received
little attention from banking historians, most of whom have tended to
focus their attentions instead on the major legislative changes that took
place during this era. What Taylor skilfully shows, however, is that, though
the number of convictions may never have been especially high, the criminal law did still play an integral role during this era (particularly towards
the end of the century) in both regulating the behaviour of market participants and preserving the stability of the banking sector as a whole.
Building on the themes and ideas raised by Taylor is the final chapter
in this section by Hannah and Foreman-­Peck. Like Taylor, Hannah and
Foreman-­Peck choose to focus on the role that the law – in this case,
company law – played in regulating the behaviour of market participants
in the UK between 1845 and 1914. What they show is that laws such as the
Companies Clauses Consolidation Act of 1845 (supplemented by moral
codes and other private order reinforcements) did actually play a significant role in regulating the corporate economy during this era. This, in turn,
leads them to suggest that what is needed to deal with the regulatory problems thrown up by the crisis of 2007–8 is a rigorous application of the law,
employed in conjunction with a similarly tough ethical framework.
The final chapter in this section is provided by Tomasic and Akinbami.
As in many of the other chapters in this volume, their underlying aim is to
try to understand why so many banking organizations failed to predict or
foresee the financial crisis of 2007–8. To do this, they predominantly focus
on the relationship between risk management and corporate governance
in financial markets, looking not only at the role of risk in the financial
industry, but also exploring some of the various risk management failures
that took place in the UK financial sector (notably at Northern Rock and
HBOS) both during and in the build-­up to the global financial crisis of
2007–8. Ultimately, what they conclude is that effective corporate governance can go a long way towards achieving more effective risk management
in the financial sector.

PART III: MANAGING AND REGULATING

COMPLEX FINANCIAL SYSTEMS
Whilst the emphasis in the first two sections of this book is predominantly
on the historical roots of the crisis of 2007–8 (and the evolution of the US
and UK financial systems more generally), the focus in the third and final




Introduction­7

section of this volume is much more centred on the issue of how best to
respond to and deal with such disruptive events. Unsurprisingly, this is a
research area in which there has been a lot of activity since the crisis of
2007–8 (Posen and Changyong, 2013; Taylor, 2009). Alongside issues of
corporate governance and corporate accountability (Sun, Stewart and
Pollard, 2011), a great deal of this work has been focused on the role of
central banks and whether, in today’s complex and increasingly globalized
financial system, they are still capable of effective action in times of crises
(Davies and Green, 2010; Eijffinger and Masciandaro, 2012).
What the chapters in this third and final section all try to do is enhance
and broaden our understanding of how best to respond to the unique
challenges that are posed when financial and/or banking crises take place
in complex financial systems. Getting this process started is Bent, whose
entry on the history of the US government’s responses to economic and
financial crises forms the first chapter in this section. In terms of its
structure, his work is organized in a chronological fashion, with the initial
sections looking at the government’s responses to the crises of the late
nineteenth and early twentieth centuries, and the latter sections focusing
more on the crisis of 2007–8. Amongst the key points that he touches upon
in his analysis is the issue of whether or not governments ought to play

an interventionist role in the financial system and how far rising levels of
complexity in the financial sector have affected the government’s ability to
respond to financial crises.
Complementing Bent’s chapter is the next entry by Arvind, Gray and
Wilson, which provides a detailed comparison of mid-­nineteenth-­century
legal responses to bank failures in the UK and the more recent regulatory
response to the crisis of 2007–8. Methodologically, the authors’ analysis
expertly weaves together historical and legal approaches, looking not only
at the events surrounding the various crises under discussion, but also at
the legal narratives and moral frameworks that built up around each of
these debacles. In the end, what they show is that, despite the huge structural differences between modern finance and nineteenth-­century finance,
there are still a number of important lessons that can be learned from how
the Victorians responded to banking crises.
Offering another historically orientated approach to financial crises is
the following entry by Billings, which examines the changing relationship
between financial reporting, banking and financial crises in the UK during
the twentieth century. Conceptually, his entry is motivated by a desire to
understand whether or not the ending of nondisclosure by the ‘Big Five’
UK banks and the subsequent introduction of fair value accounting (FVA)
has actually helped enhance the stability of the UK financial sector by
making it more transparent. Overall, what he concludes is that, whilst FVA


8

Complexity and crisis in the financial system

may be beneficial to certain markets, the unique and complex nature of the
banking industry makes it much harder to apply a single financial reporting framework capable of satisfying the needs of every stakeholder.
Concluding this section is the final entry of the volume by Singleton,

which uses the Disaster Management Cycle (DMC) framework to examine
and understand different responses to financial crises. Used primarily for
responding to natural disasters, the DMC framework provides an interesting lens through which to approach financial crises in that it shifts the focus
onto the stages through which disasters unfold and develop. As Singleton
convincingly argues, this not only helps highlight possible areas of weakness in crisis response strategies, it also makes it easier for economists and
those working in the natural sciences to compare notes and share ideas.

FINAL REMARKS
Before we embarked upon this book project, we were all well aware of the
many challenges and pitfalls inherent in trying to pursue an interdisciplinary research agenda (Montuori, 2013; Strober, 2011). Yet, at the same
time, we were also aware that, if we were ever going to start unpicking the
nature of the relationship between financial crises and complexity levels
in financial systems, we would need to ask questions and deal with issues
that did not sit comfortably within any one academic discipline. The only
option, therefore, was to eschew the traditional disciplinary boundaries
and take on the challenges that inevitably accompany any attempt to
produce a fundamentally interdisciplinary piece of work.
The book that you see before you is the end product of our efforts in
this respect. As you will see, we have resolutely stuck to our original cross-­
disciplinary research agenda, bringing together a range of academics and
practitioners from across the disciplinary backgrounds to look in more
depth at the historical and institutional aspects of the relationship between
financial crises and complexity levels in the US and UK financial sectors.
Taken together, their respective contributions have helped to produce a
book that not only challenges many often taken-­for-­granted ideas about
the nature of financial crises, but also offers something truly unique to the
flourishing literature on the long-­term causes (and consequences) of the
global financial crisis of 2007–8.

Introduction­9

NOTES
1. Gapper, J., ‘King’s Men Must Put Themselves Together Again’, Financial Times, 19
September 2008.
2. Statement by Andrew Tyrie before the Parliamentary Commission on Banking Standards,
17 January 2013, q.2626, available at: www.publications.parliament.uk/pa/jt201213/
jtselect/jtpcbs/c606-­xxiv/c606xxiv.pdf [accessed 28 November 2014]. For more on the
seeming ineffectiveness of the US and UK regulatory authorities, see Gray and Akseli
(2011), Green, Pentercost and Weyman-­Jones (2011) and MacNeil and O’Brien (2010).

REFERENCES
Bagehot, W. (1910), Lombard Street: A Description of the Money Market, London:
E.P. Dutton & Co.
Blackburn, R. (2008), ‘The Subprime Crisis’, New Left Review, 50, 63–106.
Buchheit, L.C. (2008), ‘Did we Make Things too Complicated?’, International
Financial Law Review, 27 (3), 24–28.
Caballero, R.J. and A. Simsek (2009), Complexity and Financial Panics, NBER
Working Paper No. 14997, Cambridge, MA: NBER, available at: www.nber.org/
papers/w14997 [accessed 25 November 2014].
Casey, T. (2011), The Legacy of the Crash: How the Financial Crisis Changed
America and Britain, London: Palgrave Macmillan.
Christophers, B. (2009), ‘Complexity, Finance, and Progress in Human Geography’,
Progress in Human Geography, 33 (6), 1–18.
Daunton, M. (2011), History and the Financial Crisis, Policy Papers, History
and Policy, available at: www.historyandpolicy.org/policy-­papers/papers/history-­
and-­the-­financial-­crisis [accessed 7 October 2014].
Davies, H. and D. Green (2010), Banking on the Future: The Fall and Rise of

Central Banking, New York: Princeton University Press.
Davies, W. and L. McGoey (2012), ‘Rationalities of Ignorance: On Financial Crisis
and the Ambivalence of Neo-­liberal Epistemology’, Economy and Society, 41
(1), 64–83.
Duit, A. and V. Galaz (2008), Governance and Complexity: Emerging Issues for
Governance Theory, Governance, 21 (3), 311–35.
Eijffinger, S. and D. Masciandaro (eds) (2012), Handbook of Central Banking,
Financial Regulation and Supervision: After the Financial Crisis, Cheltenham and
Northampton, MA: Edward Elgar.
Ferguson, N. (2001), The Cash Nexus: Money and Power in the Modern World,
1700–2000, London: Allen Lane.
Gilpin, D.R. and P.J. Murphy (2008), Crisis Management in a Complex World,
Oxford: OUP.
Goldin, I. and T. Vogel (2010), ‘Global Governance and Systemic Risk in the
Twenty-­first Century: Lessons from the Financial Crisis’, Global Policy, 1 (1),
4–15.
Goodhart, C.A.E. (2008), The Regulatory Response to the Financial Crisis,
CESifo Working Paper No. 2257, available at: www.econstor.eu/bitstream/1041
9/26302/1/560533586.PDF [accessed 30 November 2014].
Gray, J. and O. Akseli (eds) (2011), Financial Regulation in Crisis? The Role of Law