John D. Turner has published an impressive array of articles on aspects of the British and Irish banking and financial systems in the nineteenth century. A major theme of his work is that the success and stability of banking in the nineteenth century was underpinned by governance and ownership structures, which in turn were constrained by legal requirements and customary practices derived from those requirements. In the second quarter of the nineteenth century, British joint stock banks were required by law to have joint and unlimited liability, meaning that each and every shareholder was liable for the whole of a failed bank's losses. Unlimited liability compelled shareholders to take a close interest in the prudent running of their bank. It also meant that shareholders monitored one another. If shares fell into the hands of individuals without deep pockets, they would not be in a position to bail out the bank in an emergency or repay depositors after its failure, throwing the entire burden on a small group of wealthier shareholders. Consequently, banks established procedures for ensuring that shares were not sold or transferred to unsuitable persons. This system served the banking system well, failures were relatively rare, and when they did occur depositors got their money back.

In Banking in Crisis, Turner seeks to explain the Great Crash of 2007–2008, by far the worst in British history, with the help of insights from his previous research into nineteenth-century banking. He constructs a persuasive argument, one that demonstrates the value of economic and business history as a framework for exploring and finding solutions to contemporary economic problems.

Banks have an incentive to engage in “risk shifting”—making risky loans in order to boost profits while fooling their depositors into thinking that they are behaving prudently. Depositors are in an awkward situation because they do not know the details of each loan, partly for reasons of client confidentiality. An antidote to the hazards of risk shifting is to impose unlimited or extended liability on bank shareholders, including directors. Shareholders with unlimited liability will not tolerate excessive risk shifting. Legislative change in the late 1850s, however, led to the introduction of limited liability banking. Part of the rationale for this development was the desire of middle-class persons to become bank shareholders, something that was not feasible under unlimited liability. Many banks preferred to persist with unlimited liability in the 1860s and 1870s because of the reassurance it gave to depositors. But the collapse in 1878 of the City of Glasgow Bank, which had unlimited liability, imposed crippling losses on shareholders and hastened the trend towards limited liability.

The ratio of bank capital to deposits in the United Kingdom fell dramatically between 1900 and 1960. Following a spate of mergers in the early twentieth century the banking sector came to be dominated by a handful of banks that, in today's parlance, were too big to fail. Their numerous shareholders had nothing at stake beyond the cost of their shares. Yet Britain did not experience any major banking collapse during the twentieth century, not even between 1929 and 1933. One cause of stability was intervention by the Bank of England, to arrange bailouts of smaller banks that fell into difficulty. Perhaps more importantly, however, is the fact that from World War II onwards, the banking system was tightly regulated and force-fed relatively safe government stock, albeit less out of concern for banking stability than as a prop for macroeconomic policy. Banks and their depositors ran no risks. When the authorities loosened their grip on the banking sector in the final decades of the twentieth century, while continuing to promise depositor protection, the constraints on risk shifting disappeared. British banks were no longer prevented from risk shifting by the state, their shareholders, or their depositors, while the internationally agreed prudential ratios in the Basel Accords were easily evaded. The events of 2007–2008 were the almost inevitable outcome of poor governance and a lack of accountability.

The least convincing part of Turner's story is that covering the 1920s and 1930s. Capital-to-deposit ratios were lower than before 1914, unlimited liability no longer ruled, and official regulation of the banking system was still very light handed. In some respects, then, the operational environment in the 1920s and 1930s was comparable to that in the 1990s and early 2000s. But there was no banking crash in Britain during the Depression. Turner argues that the Bank of England under Montagu Norman was already exercising informal but effective oversight of the banking system between the wars. Turner does not, however, spend much time on this period. An alternative, or perhaps complementary, explanation for the conservatism of British banks between the wars might be that banking culture was slow to change and essentially still Victorian.

In the concluding chapter, Turner offers some policy recommendations. He argues that the reintroduction of some form of extended, though probably not unlimited, liability for banks would increase the stability of the system. Banks with extended liability would be less likely to create the credit booms seen in the late twentieth and early twenty-first centuries. Turner also advocates the abolition of depositor protection and the introduction of a credible commitment against bailouts. I am not so sure about scrapping depositor protection.

Banking in Crisis is an important contribution to financial history and contemporary policy debate. But the vested interests upholding the current banking regime are so strong that, without an even more catastrophic collapse than that of 2007–2008, the prospects for radical reform are minimal. Basel III will be gamed by the banks, and so will the planned ring-fencing of retail banking.