How has the UK’s financial system changed over the past 100 years?

The UK’s financial system has been forged by economic shocks, political priorities and market changes. Over the past century, banks have come to play a bigger role, not least for firms looking to raise capital. Recent reforms seek to revive corporate equity and bond markets to support growth.

Around the beginning of the 20^th century, the UK financial system was among the largest and most consequential in the world. But it was organised very differently from how it is today.

The banking system, although already consolidating rapidly, included hundreds of local and regional banks embedded in local economies, whose business generally focused on short-term credit. London, meanwhile, was the world’s leading securities market.

Both the British equity and corporate bond markets were well developed and globally dominant, and many of the world’s largest companies were listed on the London Stock Exchange.

Today, by contrast, the UK financial system is vastly larger in relative terms, but composed differently. The banking system is highly concentrated and accounts for a much bigger share of the system’s total assets. London no longer dominates global equity markets, and the UK’s domestic corporate bond market is now relatively minor.

This relative decline helps to explain recent reforms aimed at making UK capital markets more attractive to companies and investors. Understanding this trajectory requires an examination of how a century of shocks, regulatory choices and institutional shifts repeatedly reshaped the system.

Bank consolidation and expansion

Driven by a wave of mergers, the number of UK banks fell from 387 in 1870 to 75 in 1920 (Braggion et al, 2017). By the 1920s, the ‘big five’ London clearing banks (Barclays, Lloyds, Midland, National Provincial and Westminster) had emerged from this consolidation and dominated national branch banking. Collectively, they held around 80% of deposits and operated about 10,000 branches (Billings and Capie, 2011).

Today, an even more consolidated ‘big four’ anchor the UK banking landscape. Barclays and Lloyds remain major UK banking groups; National Provincial and Westminster merged to form National Westminster Bank, now part of NatWest; and Midland became part of HSBC in 1992.

In the first part of the 20^th century, banks lent to individuals and firms mainly through overdrafts, advances and bill discounting. They helped borrowers to manage working capital, trade payments and temporary cashflow needs rather than providing long-term capital (Capie and Collins, 1999; Collins and Baker, 2003).

This business model reflected the de facto institutional division of labour of the time: banks supplied short-term liquidity; while securities markets were more important for long-term risk capital (Collins, 1991). This divide was cemented in the interwar years, as the Great Depression forced a flight to safety by lenders and investors. The resulting shortfall in long-term finance for growing firms was labelled the Macmillan Gap.

After the Second World War, UK banking was shaped by a controlled and segmented financial system. Official guidance, liquidity requirements, special deposits and exchange controls influenced private sector credit, while institutional boundaries limited competition between clearing banks, merchant banks and other financial institutions (Goodhart, 2015; Bowen et al, 1999).

The result was a protected but highly restricted system: bank lending was tightly capped and directed, while liquidity requirements encouraged banks to hold Treasury bills and government securities, supporting public debt in a period of high post-war borrowing (Turner, 2014; Reinhart and Sbrancia, 2015; Goodhart and Needham, 2018).

This protective but restrictive era ended with the 1971 Competition and Credit Control reforms. These sought to replace direct lending controls with market-based monetary management, using interest rates and money market operations rather than administrative restrictions (Goodhart, 2015). The reforms gave banks more scope to compete for funds and expand their lending.

Following this deregulation, firms made greater use of bank debt (Braggion and Ongena, 2019). Indeed, banks’ share of corporate external finance rose to roughly 60%, while term lending exceeded 40% of clearing bank advances (Bank of England, 1980).

At the same time, mortgage lending and household debt became central to banks’ balance sheets. This marked a departure from traditional clearing bank activities focused on commercial payments and short-term credit. It also linked UK banking more closely to property markets and the wider ‘great mortgaging’ of advanced economies (Davies et al, 2010; Jordà et al, 2016).

By 2022, banks held £14 trillion of the UK's £27 trillion in financial assets, cementing their status as the largest single component of the financial system (House of Commons Library, 2024).

The decline of equity and corporate bond markets

At the beginning of the century, London was the world’s leading securities market: the London Stock Exchange was the largest exchange in the world by both number and value of quoted securities. By 1912, more than two-thirds of the world’s largest companies had securities quoted in London (Hannah, 2011; Coyle et al, 2019; Campbell et al, 2021).

As London’s strength lay in both debt and equity markets, its 20^th century evolution is best understood by analysing these two pillars separately.

The dominance of the equity market proved unsustainable, as its global position weakened during the middle decades of the century. While capital controls restricted international openness, domestic shocks like war, nationalisation and inflation simultaneously contracted the volume of listed firms and eroded investor appetite for equities. Consequently, the UK equity market became increasingly insular, limiting its global reach and relative depth (Rajan and Zingales, 2003; Cheffins and Reddy, 2023a).

A major institutional change for the equity market came with the 1986 ‘big bang’ reforms, which abolished old trading restrictions and opened the market to greater competition and foreign firms. This helped to shift London towards a more international and investment banking-led model (Bellringer and Michie, 2014; Schenk, 2020).

While this helped to preserve London as a vital hub for foreign investment banking and derivatives trading, it failed to arrest the long-term decline of the domestic corporate equity market. British institutional investors steadily shifted away from UK equities, and domestic listings stagnated (Cheffins and Reddy, 2023b; New Financial, 2024).

Recent market capitalisation data show that the London Stock Exchange is now far behind the United States and several Asian and European exchanges (World Federation of Exchanges, WFE, 2026; Association for Financial Markets in Europe, AFME, 2025).

Figure 1: Historical stock market capitalisation

Source: Global financial data, World Bank

The UK corporate bond market followed a related but distinct path. In the early 20^th century, corporate bonds, alongside equities, were a cornerstone of long-term finance for firms (Hannah, 2011; Coyle et al, 2019; Bogle et al, 2022).

Yet the domestic corporate bond market declined sharply over the 20^th century, despite a short post-1945 revival. From the 1970s onwards, the UK corporate bond market was smaller than it had been a century earlier, with war, nationalisation, taxation policy and inflation central to its long-run decline (Coyle and Turner, 2013).

It is now a relatively minor source of domestic corporate finance in the UK. The corporate bond market’s decline coincided with the growing importance of bank lending to companies. As banks expanded term lending in the 1970s, firms relied more heavily on bank debt, while high inflation made long-term, fixed-interest corporate bonds less attractive to investors. The result was a broader shift in corporate finance away from domestic bond issuance and towards bank lending (Coyle and Turner, 2013; Bank of England, 1980).

History frames modern reform

The development of the UK financial system has therefore been highly uneven. While the pre-1914 financial system was built on a diffuse network of joint stock commercial banks and globally leading equity and corporate bond markets, its centre of gravity shifted significantly over the course of the 20^th century.

In tandem with the relative decline of these securities markets, the domestic system grew increasingly concentrated around large commercial bank balance sheets, mortgage lending, government debt and institutional asset management (Bush et al, 2014; Jordà et al, 2016; Bogle et al, 2022).

This historical evolution directly frames the UK's current reform agenda. The 2022 Edinburgh Reforms and the 2025 Leeds Reforms both reflect policy concern that UK capital markets must be revived to support economic growth (HM Treasury, 2022, 2025; New Financial, 2025). These initiatives mark a distinct pivot away from the highly restrictive regulations introduced after the global financial crisis of 2007-09.

For example, the 2023 Mansion House Compact encouraged major pension providers to increase allocations to unlisted UK equities (HM Treasury, 2023).

The new Private Intermittent Securities and Capital Exchange System (PISCES) platform is being designed to let private companies trade shares without a full public listing (Ho, 2025), while the Financial Conduct Authority’s 2024 listing rule reforms attempt to restore London’s competitive edge for initial public offerings (Financial Conduct Authority, 2024).

This legislative agenda represents an effort by policy-makers to rebuild parts of the UK’s non-bank financial system that existed over a century ago. But most of this reform programme is aimed not at commercial banks, but at pension funds, insurers and asset managers, which together hold roughly £13 trillion in financial assets (House of Commons Library, 2024).

Ultimately, financial history demonstrates that the UK system did not simply grow or decline over the past century; it was repeatedly redirected by major shocks, political priorities and market adaptation. That history helps to explain today’s reform agenda: how to rebuild the non-bank channels through which firms can raise long-term capital.

Where can I find out more?

Evolution of the UK banking system: Article in the Bank of England’s quarterly bulletin, 2010.
There once was an ugly duckling: Bank of England article by Andy Haldane (formerly the central bank’s chief economist).
Britain’s equity market is shrinking: Article in The Economist.
Resuscitating the London Stock Exchange: Article by Bobby Reddy at the Cambridge Endowment for Research in Finance.
Unlocking the capital in capital markets: Analysis of the shift in risk appetite and investment away from equities by William Wright, New Financial.