Principles of crisis management revisited: the Bank of England in the 1970s

The relationship between central banks and the financial sector has received renewed attention following the global financial crisis that started in 2007. This thesis represents an attempt to shed further light on this relationship by looking at the Bank of England’s relationship with the British financial sector in the 1970s - a decade that saw the return of financial volatility and crises. While the previous literature on this period has focused on explaining the causes and build-up to the increase in volatility and crises, the approach taken in this thesis is more analytical. This is done by looking at the role, implementation and effect of the Bank of England’s crisis management policies. To tackle these issues, I use quantitative methods, such as non-Normal option pricing models and time series econometrics, on the one hand and qualitative data looking at the institutions involved on the other. As such, the thesis benefits from a multitude of primary data sources, including the Bank of England Archives, the National Archives and the archives of the largest financial institutions of the time. The main conclusion of the thesis is that the Bank of England’s attempts to stabilize the financial system at times of turbulence were more costly than has previously been argued in the literature. As such, the Bank in all likelihood underpriced its assistance to the financial system. Channels of interconnectedness are also documented with no evidence found of increased interdependence during crises. Finally, a closer look at the Bank’s rescue operations during the crisis shows the extent to which its staff was unprepared to tackle the issues involved and had neglected issues of financial stability in the lead up to the crisis