Helping financial analysts learn from past crises

Research on historical financial crises and how to prevent future crises has impacted policy-making, professional practice, training of staff at the Bank of England, and has reached tens of thousands of financial analysts.

The Research

Over the past seventeen years at Queen's Business School, John Turner has focused his research on historical financial crises, using past crises to help shed light on why crises happen and what we can do to prevent future banking crises. Turner’s research has had a beneficial impact on policy-making, professional practice, and the historical awareness and knowledge of staff at the Bank of England. It has also had a beneficial impact on the non-academic study of business history and has reached tens of thousands of financial analysts.

In response to the 2008 Global Financial Crisis, John Turner wrote the book Banking in Crisis: The Rise and Fall of British Banking Stability, asking a key question of importance to central bankers and economic policymakers: can the lessons of the past help us to prevent another banking collapse in the future? 'Banking in Crisis' was the first academic study to tell the story of the rise and fall of British banking stability over the past two centuries, shedding new light on why banking systems crash and the factors underpinning banking stability.

Turner developed a monthly index of bank share prices stretching back to 1825 and used this index to assess banking stability and identify banking crises, finding that the 2008 financial crash represented the first major banking crisis experienced in the UK since 1825. In an article subsequently published in the Journal of Financial Stability, Turner and his co-authors used the bank share price index developed in 'Banking in Crisis' to examine the consequences of banking instability. The main finding of the paper was that banking instability increases the cost of borrowing for businesses.

From 1825 until around World War II, shareholders of British banks faced calls on their personal wealth because UK banks were not pure limited liability banks – they had unlimited liability until the 1880s and extended liability thereafter. This meant that whenever banks made lending decisions, they had ‘skin in the game’, which curtailed them from taking excessive risk. From the beginning of World War II through to the early 1980s, British banks faced stringent government controls which gave them little room for manoeuvre and prevented them from making reckless loans.

However, starting in the 1970s, these controls were removed and this deregulation was a recipe for disaster. Over time banks started increasing their lending, particularly to the risky real-estate sector, which resulted in a property bubble. The collapse of this bubble resulted in huge losses for British banks and the collapse and subsequent rescue of the UK banking system.

The main lesson for central bankers and policymakers from Turner’s research is that banking can only be stable if bank shareholders have ‘skin in the game’ or if banks face stringent government controls on their assets and lending.

The Impact

Turner’s research has had a beneficial impact on policy-making, professional practice, and the historical awareness and knowledge of staff at the Bank of England, particularly with regard to its prudential objectives. Insights from his research have reached an estimated 125,000 financial analysts across the globe. 'Banking in Crisis' has sold more than 3,500 copies and has been recognised by the Business Archives Council for the contribution which it has made to the academic and professional study of business history.

Policy-making

Since 2014, Turner has been actively helping the Bank of England embed financial history into its policymaking, drawing on his research and expertise accumulated while preparing 'Banking in Crisis'. His first interaction with the Bank was when he gave a talk based on his book to 200 bank staff in July 2014. He was also invited to join three ad hoc committees and to input into the work of a further group:

An external advisory committee set up in 2014 to advise Sam Woods, the Bank’s Deputy Governor for Prudential Regulation, and his colleagues on how the Bank could use financial history to inform present-day policy-making. Turner served as the only economic historian in this group. He was asked to advise Bank economists who were examining past crises on the relevance of their work to current policy.
A committee on the future governance of the Bank of England which met in September 2014. Turner was invited to join this committee by the Bank’s Chief Economist, Andy Haldane. This committee, which included nine Bank of England staff, discussed the future structure and regulation of the UK banking system. Turner was the only economic historian on the committee with a brief to provide the historical perspective on making banking crisis proof.
An expert group which advised the Bank in 2015 on the preservation of the Bank’s archives related to the 2008 financial crisis. Turner was invited to join this group in October 2014 by the Bank’s Chief Economist, Andy Haldane, and by the Bank’s Head of Archives, Mike Anson. Turner was one of three economic historians on the group. His role was to advise on which records should be preserved from the 2008 crisis to help guide the Bank when the next crisis occurred.

Training financial staff

As a result of advice provided by Turner and others to the first of the aforementioned committees, the Bank of England set up an innovative Financial Stability History Workshop in 2014. This initiative was designed to help staff to develop and share historical knowledge which supports the Bank’s policy making and delivery, with 40 bank staff as members of this group. Turner delivered, by invitation, two talks to members of this group in 2014 and 2018 respectively. These talks were based on content from Turner’s 'Banking in Crisis' book and on his forthcoming book on financial bubbles. Turner also participated in meetings of this Workshop in 2014 and 2015, and provided feedback to staff members on their own research.

The Bank’s Deputy Governor for Prudential Regulation summed up the contribution of Turner’s research and expertise to the Bank’s policy-making, professional practice, and staff knowledge and awareness:

“By helping staff to acquire knowledge about the history of financial crises, Professor Turner has made a valued contribution to the Bank of England’s pursuit of its objectives promoting the safety and soundness of regulated banks and insurers and maintaining financial stability…The subjects of Professor Turner’s research are directly relevant to the Bank of England’s prudential objectives. His sustained engagement with the Bank means that its impact will be felt through the enhanced policy-making and supervisory abilities of the staff whom he has helped equip with new historical perspectives.”

Commenting on the impact of the Financial Stability History Workshop, two of the Bank’s economists commented:

"The [Workshop] group continues to be extremely popular in the Bank and it has achieved its aim of improving staff’s knowledge of financial history. The impact of this on policy is indirect and hard to quantify, but could prove very significant. For instance, the former Chair of the Federal Reserve, Ben Bernanke, credits his response to the challenges in the Global Financial Crisis to his knowledge of the Great Depression."

Global reach

The economists also noted that Turner's research and advice had had a tangible impact on specific research and policy debates at the Bank and that, in particular, his work on the history of extended and unlimited liability in the banking system had informed discussions at the Bank about contingent capital.

In addition, the impact of and engagement with Turner’s research has reached well beyond the Bank of England. 'Banking in Crisis' has sold more than 3,500 copies across the UK, Europe, United States and Asia, and has been translated into Chinese following market demand. In 2015, the book was awarded the Wadsworth Prize 2014 by the Business Archives Council. This prize is awarded on an annual basis for a book which has made an outstanding contribution to the academic and professional study of business history. The citation from the prize committee stated the following: “This is both an original and an important book. …In sum, it is a book that is original, insightful, persuasive, timely and highly readable.”

'Banking in Crisis' was among the books listed by the blogger and financial journalist, Bilal Hafeez, as essential reading for anyone working in the financial industry.

Writing in the Economic History Review, Mark Billings, an academic at the University of Exeter’s Business School, commented: "Regulators and policy makers should also read the book, not least to be shaken from any post‐crisis complacency by Turner's gloomy conclusions on the direction of banking regulation."

Turner also drew on insights from his research when he was commissioned, in 2014, along with Dr David Chambers of the University of Cambridge, by the global Chartered Financial Analyst (CFA) Society and Institute to write an article on financial history which was distributed to the CFA’s 170,000 global membership. Additionally, he was asked to write a thought leadership article on the history of financial crises for the special 60^th anniversary edition (Spring 2015) of the CFA’s Professional Investor publication, which is distributed to 11,000 investment professionals in the UK.

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