A system of trading in money which involved safeguarding deposits and making funds available for borrowers, banking developed in the Middle Ages in response to the growing need for credit in commerce. The lending functions of banks were undertaken in England by money‐lenders. Until their expulsion by Edward I in 1291, the most important money‐lenders were Jews. They were replaced by Italian merchants who had papal dispensations to lend money at interest. In the 13th cent. credit was essential to finance commerce and major projects. The most important was the wool trade but other examples included large buildings such as Edward's castles in north Wales. When Italians had their activities in England curtailed in the early 14th cent., they were replaced by English merchants and goldsmiths, whose rates of interest were sufficiently low to avoid the usury laws.
Monarchs had borrowed from merchants and landowners for centuries. By the late 17th cent., the growth of parliamentary power over government expenditures required more regulation. The Bank of England, founded in 1694, gave the government and other users of credit access to English funds. Similar developments occurred in Scotland and Ireland. These banks remained without serious competition until the later 18th cent., when expanding commercial activities gave scope to merchants, brewers, and landowners to establish banks based on their own cash reserves. Errors of judgement sometimes occurred and ‘runs on the bank’ took place when depositors, fearing for the security of their money, demanded its return.
Fluctuations in the value of money because of the return to a gold‐based currency after the end of the Napoleonic wars (1815) precipitated a series of crises. To stabilize the currency the government eventually introduced the 1844 Bank Charter Act, which gave the Bank of England the functions of supervising the note issue and of monitoring the activities of the banking system. Regulatory powers were put in place in 1845 to control banking in Scotland and Ireland.
In the 19th cent., overseas trade and the expanding British empire reinforced the place of London as a centre of merchant banking. The skills of these specialist bankers attracted business from foreign firms and governments seeking loans. These arrangements made possible the rapid development of railways, heavy engineering, mines, and large commercial developments. Many of these merchant banks survive, including Rothschilds, Lazard Brothers, Kleinwort Benson, and Schroders. Internal trade was funded mainly by a larger number of local banks which, after the middle of the 19th cent., became consolidated into a much smaller number of banks. Numbers continued to diminish so that by 1980 banking was dominated by four companies: Barclays, Lloyds, Midland, and National Westminster.
Banking has been characterized, largely because of technological innovation, by an increasingly sophisticated provision of banking services and an expansion of consumer credit. The business of safeguarding and lending money is often arranged through machine‐readable cards and continuous access by telephone.
One of the most severe crises in banking took place in 2007 when, after a number of bad mortgage debts in America, Northern Rock, based in Newcastle, ran into severe difficulties. Though given respite by a large government‐backed loan, Northern Rock's predicament led to accusations that many bankers had pursued irresponsible and damaging lending policies.