Banking systems and economic growth: lessons from Britain and Germany in the pre-World War I era

Banks and banking - History ; Banks and banking - Germany ; Banks and banking - Great Britain ; Germany ; Great Britain

The Universal Banks and the Mobilization of Capital in Imperial Germany

Capital mobilization represents a serious obstacle to industrialization. By stimulating savings, matching savers and investors, and offering advice to entrepreneurs, universal banks are believed to have eased such problems during the later stages of the German industrialization. Using evidence on deposit taking, branching, and banks' liability structure as well as the extent of interlocking directorates between banks and industrial companies, this paper demonstrates that the universal banks played a limited part in capital mobilization and expansion until the start of the twentieth century. The paper shows, however, that networks of the provincial banks enveloped a broad range of industrial companies

Regulation, Taxation, and the Development of the German Universal Banking System, 1884-1913

Previous researchers argue that the legal and regulatory environment helped shape the German financial system in the nineteenth and early-twentieth centuries, with particular emphasis on the damaging effects of the stock-exchange law of 1896. This paper finds that the stock exchange law of 1896 exerted little measurable impact on the growth and concentration of the universal banking system or on the business turnover of universal banks relative to securities markets. The paper also shows that the English commercial banking sector and the German universal banking sector underwent similar movements toward concentration between 1884 and 1920 (both accelerating after 1912), despite no corresponding regulatory changes in England–further suggesting that consolidation of universal banking resulted from factors other than the 1896 law

Liquidity and Competition in Unregulated Markets

Despite reputedly widespread market manipulation and insider trading, we find surprisingly high liquidity and low transactions costs for actively traded securities on the NYSE between 1890 and 1910, decades before SEC regulation. Moreover, market makers behave largely as predicted in theory: stocks with liquid markets and competitive market makers (cross-trading at the rival Consolidated Exchange) trade with substantially lower quoted bid-ask spreads and with less anti-competitive behavior (price discreteness). Effective spreads, illiquidity, and volume all improve monotonically over time. Notably, the asymmetric information component of effective spreads increases in relative and absolute terms from 1900 to 1910.

Relationship Banking, Liquidity, and Investment in the German Industrialization

Because of apparently close ties between banks and industry, German-style universal banking is thought by many to improve investment efficiency. This paper presents new evidence to the contrary. Using a panel of firm data from Germany's heavy industrialization period (1903-1913), the analysis shows that investment is more sensitive to internal liquidity for bank-networked firms than unattached firms, and that this effect is only minimally offset in the long run. Furthermore, the paper presents extensive evidence on the characteristics of bank-attached firms and demonstrates through direct tests that the estimated investment equations are free of selection bias

Bank Securities Holdings and Industrial Finance Before World War I: Britain and Germany Compared

Orthodox paradigms hold that through direct involvement with firms, the German universal banks funneled substantial amounts of financial capital into industry during the half century before World War I. At the same time, by avoiding such engagement with industrial companies, British banks are thought to have disadvantaged that country's economy with respect to its continental and American competitors. Using balance sheet data for the British deposit banks and the German universal banks, this paper shows that the German and British banks held approximately the same proportion of their assets in the form of non-government securities. In addition, the paper uses details garnered from two of the largest German banks to demonstrate that the universal banks became directly involved in only a few companies, that the total of these equity holdings amounted to a small share of bank assets, and that often the shares remained on the banks' books only because of an insufficient market for new issues. Thus, the idea that the German universal banks purposely took long-term stakes in industrial companies in order to credibly commit to behaving in the long-run interest of the firms finds limited support from this analysis

Financial System Structure and Industrialization: Reassessing the German Experience before World War I

Lack of both theoretical cogency and empirical evidence casts doubt on the Gerschenkronian paradigm of banking and industrial development. Social, political, and regulatory environments may shape financial systems, and institutions may persist beyond their usefulness. Central features of universal banking arose late in the German industrialization, if at all; those that did may not have stemmed from the banks' universal structure. In focusing on international differences among financial systems, traditional views on the relative benefits of universal banking may underestimate both the impact of non-institutional factors on development experiences and the similarities in the ultimate effects of disparate systems

Revolutionary Finance? Capital Mobilization and Utilization in Pre-War Germany and Italy

Accumulation, mobilization, and efficient utilization of capital represent serious obstacles to industrialization. Financial institutions may ease these problems by stimulating savings, matching savers and investors, and offering business or investment advice to entrepreneurs. German-style universal banks are believed by many to have played a crucial part in overcoming all three capital related stumbling blocks. Using evidence on deposit taking and branching, banks' liability structure, interlocking directorates between banks and industrial companies, and firm-level investment patterns, the paper investigates the role of German and Italian universal banks in the mobilization and efficient utilization of capital at the turn of the last century

Relationship Banking and corporate governance in the Kaiserreich

This paper focuses on the institution of interlocking directorates between universal banks and industrial firms in the Kaiserreich (1871-1914) and demonstrates that such formalized relationships were unusual prior to 1900. The investigation indicates further that there was a marked increase in bank representation at firms-both in the share of firms involved in such relationships and in the number of joint directors-around the turn of the century. Finally, the work suggest a number of explanations for the pattern of bank relationships that emerges