Essay Plan - UK Big Bang - ECON0051 Economics of Regulation
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Course
Economics of Regulation (ECON0051)
Institution
University College London (UCL)
This is an essay plan for a group project that scored 70% - it is a structured plan that is easy to communicate through and adapt to your own project.
Full essay available on my profile.
Topic: investigating the deregulation of financial markets under Margaret Thatcher in 1986.
Agent: the London Stock Exchange
Two main policies to be analysed:
1. Abolition of fixed commissions.
2. Opening the LSE up to foreign players.
Description of the industry:
Market structure: The LSE was a natural monopoly in a closed market.
Issues:
o International competitiveness: LSE was anticompetitive and worked hard to keep competition low (e.g. keeping
barriers to entry high, allocating uneven power for each vote made by members). This led to London falling behind
New York and Tokyo.
o Regulatory capture: the LSE had a close relationship with the government and the Bank of England. So there was
ineffective regulation in place.
Impacts: The policies analysed led the path to the Big Bang that propelled the UK among top financial markets in the world.
History: Brief summary of the history of the LSE post-1970.
Market structure:
Before 1986: the LSE was a natural monopoly. Primarily dealt with British investors and institutions.
After 1986: more competitive than before. influx of deal volume from international banks; increasing globalisation.
We are not really sure what market structures this case falls into.
Analysis of the regulator:
Generally agreed that although the govt released communications leading up to the regulations, the specific events that led
to the regulations cannot be pinpointed.
Balancing of benefits between businesses and the LSE.
Impacts:
Short-term impacts:
o In the immediate term, the LSE was uncompetitive with other exchanges like the NYSE (which had been
internationally open for longer). The govt had estimated short term loss of business to competitor to be £4bn per
year but this was a large underestimation.
o Efficiency increased through cost cutting and increased competition. Within a year, 75 of 300 member firms were
foreign.
o Increased efficiency led to better pricing for businesses – volume of trade increased to an average $7.4bn a week
after the Big Bang from $4.5bn a week before the Big Bang.
Long-term impacts:
o Many economists believe that the Big Bang led to the financial crisis of 2008.
o There is now rising regulation in financial markets again.
o Spurred innovation and growth of the UK’s services sector as liberalisation invited foreign competition. We will try
to find data for the growth of the UK financial sector after the deregulation.
Related cases:
The Big Bang in Japan – 1997; we will compare causes, impacts and effectiveness.
Other comments:
Financial liberalization is synonymous to a multi-person prisoner’s dilemma - when a country chooses to deregulate its
financial market, it incentivises for other players to do same to avoid being a left behind as a repressed financial market
Following the liberalization of the US financial markets in the mid-1970s, UK was under substantial pressure to do the same
Before Big Bang:
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