The determinants of multinational banking during the first globalization, 1870-1914.

What determined the multinational expansion of European banks in the pre1914 era of globalization? And how were banks' foreign investments related to other facets of the globalizing world economy such as trade and capital flows? The paper reviews both the contemporary and historical literature, and empirically investigates these issues by using an original panel data based on a sample of more than 50 countries. The dependent variable, aiming at measuring the intensity of crossborder activities operated by banks from foreign locations, is the number of foreign branches and subsidiaries of British, French and German banks. Explanatory variables are mainly selected on the base of the eclectic theory of multinational banking, but also include geographical factors (as suggested by gravity models) and institutional indicators advanced by recent studies inspired by new institutional economics, such as legal families and adherence to the Gold Standard. These regressors captures the impact of economic integration (trade and capital flows), informational development, institutional and economic characteristics of the hostmarket, as well as exchange rate and country risk factors, on banks' foreign investment decisions. The results suggest that, due to its prevailing 'colonial' features, pre1914 multinational banking does not fit easily into augmented gravity models. The role of trade as a key determinant of banks expansion overseas is qualified, and both institutional factors as well as competitive interaction emerge as critical determinants of banks' decisions to invest in foreign countries. Moreover, the systematic comparison of determinants of foreign investiments of banks from major core countries reveals that multinational banking was not a homogenous phenomenon, as banks of different nationality responded differently to economic, geographical and institutional factors

Capital mobility and financial repression in Italy, 1960-1990 : a public finance perspective

After significant headway towards liberalization of capital movements in the early 1960s, European governments resorted massively to capital controls in the turmoil of the demise of the Bretton Woods system. In some countries (Italy among others), what looked like a temporary backlash against incipient financial globalisation caused an escalation of domestic and external controls, leading to a comprehensive and long-lasting regime of financial repression. Why financial repression was so hard to dismantle, in spite of its widely recognized distortionary impact? Why did governments stick so long to sub-optimal policy instruments? By concentrating on the Italian case, this paper argues that a public finance approach may provide an answer to such questions. More specifically, following the literature on the political economy of capital controls and the fiscal implications of financial repression, the paper suggests that policies increasing revenues from implicit taxation may be regarded as an attempt to postpone the structural change in the established fiscal policy regime that capital liberalization necessarily entailed. As capital controls (and financial repression, more generally) substantially contributed to ease the government's budget constraint under conditions of structural deficit and rapidly rising debt, liberalization was expected to exacerbate fiscal problems. The paper illustrates the policy measures deployed to increase seigniorage revenues, grant implicit subsidies to the government and enforce financial protectionism. It also provides for the first time an estimation of the economic relevance of revenues from financial repression, which proved to be of a magnitude comparable to revenues from seigniorage. High revenues from implicit taxation (relative to GDP) can be considered a rough approximation of the cost of financial liberalization and may explain why the process of financial reform was slow and controversial

The determinants of multinational banking during the first globalization, 1870-1914

What determined the multinational expansion of European banks in the pre1914 era of globalization? And how were banks' foreign investments related to other facets of the globalizing world economy such as trade and capital flows? The paper reviews both the contemporary and historical literature, and empirically investigates these issues by using an original panel data based on a sample of more than 50 countries. The dependent variable, aiming at measuring the intensity of crossborder activities operated by banks from foreign locations, is the number of foreign branches and subsidiaries of British, French and German banks. Explanatory variables are mainly selected on the base of the eclectic theory of multinational banking, but also include geographical factors (as suggested by gravity models) and institutional indicators advanced by recent studies inspired by new institutional economics, such as legal families and adherence to the Gold Standard. These regressors captures the impact of economic integration (trade and capital flows), informational development, institutional and economic characteristics of the hostmarket, as well as exchange rate and country risk factors, on banks' foreign investment decisions. The results suggest that, due to its prevailing 'colonial' features, pre1914 multinational banking does not fit easily into augmented gravity models. The role of trade as a key determinant of banks expansion overseas is qualified, and both institutional factors as well as competitive interaction emerge as critical determinants of banks' decisions to invest in foreign countries. Moreover, the systematic comparison of determinants of foreign investiments of banks from major core countries reveals that multinational banking was not a homogenous phenomenon, as banks of different nationality responded differently to economic, geographical and institutional factor

Corporate governance, moral hazard and conflict of interest in Italian universal banking, 1914-1933

Universal banking is widely held to enjoy comparative advantages in corporate finance. Recent theories of financial intermediation argue that 'insider systems' are better suited to effectively deal with long-term growth and moral hazard problems. However, little attention (if any) is usually paid to corporate governance problems that are specific to universal banking. How can banks' ownership structure and agency problems influence their ability to address longterm growth and moral hazard problems? Under which institutional arrangements, incentives and constraints can universal banking effectively realize its potential? The paper looks at such issues through the experience of interwar Italy. The evolution of universal banking in the 1920s emerges as heavily exposed to potentially serious problems of moral hazard and conflicts of interest, due to inefficient corporate governance, lack of external controls and a moral-hazard-enhancing institutional set-up. These factors may distort bank managers' incentives, affect strategic trade-offs and lead to unsound banking. The findings are consistent with that part of corporate governance literature which points to the potential for moral hazard and conflicts of interest inherent to universal banking and emphasise the conditional and historically-specific nature of its alleged benefits

CAPITAL MOBILITY AND FINANCIAL REPRESSION IN ITALY, 1960-1990: A PUBLIC FINANCE PERSPECTIVE

After significant headway towards liberalization of capital movements in the early 1960s, European governments resorted massively to capital controls in the turmoil of the demise of the Bretton Woods system. In some countries (Italy among others), what looked like a temporary backlash against incipient financial globalisation caused an escalation of domestic and external controls, leading to a comprehensive and long-lasting regime of financial repression. Why financial repression was so hard to dismantle, in spite of its widely recognized distortionary impact? Why did governments stick so long to sub-optimal policy instruments? By concentrating on the Italian case, this paper argues that a public finance approach may provide an answer to such questions. More specifically, following the literature on the political economy of capital controls and the fiscal implications of financial repression, the paper suggests that policies increasing revenues from implicit taxation may be regarded as an attempt to postpone the structural change in the established fiscal policy regime that capital liberalization necessarily entailed. As capital controls (and financial repression, more generally) substantially contributed to ease the government’s budget constraint under conditions of structural deficit and rapidly rising debt, liberalization was expected to exacerbate fiscal problems. The paper illustrates the policy measures deployed to increase seigniorage revenues, grant implicit subsidies to the government and enforce financial protectionism. It also provides for the first time an estimation of the economic relevance of revenues from financial repression, which proved to be of a magnitude comparable to revenues from seigniorage. High revenues from implicit taxation (relative to GDP) can be considered a rough approximation of the cost of financial liberalization and may explain why the process of financial reform was slow and controversial.