Universal banking and the financing of industrial development

Abstract

In universal banking, large banks operate extensive networks of branches, provide many different services, hold several claims on firms (including equity and debt), and participate directly in the corporate governance of firms that rely on the banks for funding or as insurance underwriters. In this paper, the author contrasts the cost of financing industrialization in the United States and in Germany during the second industrial revolution. He explains that large production is typical of modern industrial practice, so the lessons from that period apply broadly to contemporary developing countries. The second industrial revolution involved many new products and technologies. Firms were producing new goods in new ways on an unprecedented scale. Therefore, they needed quick access to heavy financing. Finance costs for industry were lower in Germany than in the United States, because U.S.regulations prevented the universal banking from which Germany benefited. High finance costs retarded U.S. realization of its full industrial potential. The potential to expand quickly and reap economies of scale was greater in German industrialization. The cost of industrial financing began to decline when institutional changes came about that increased the concentration of financial market transactions. In recent decades, a combination of macroeconomic distress, international competitive pressure, and the creative invention of new financial intermediaries has helped the U.S. financial system overcome the regulatory mandate of financial fragmentation.Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Labor Policies,Decentralization,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies,Housing Finance