Bank Structure and Growth: Insights from British and German Bank Balance Sheets Before World War I

Abstract

Financial institutions may enhance economic growth by raising the quantity, quality (productivity), and efficiency of investment. The structure of the German system is thought by many to have amplified these beneficial effects. Orthodox paradigms hold that through direct involvement with firms, the German universal banks funneled substantial amounts of financial capital into industry and credibly committed to behaving in the long-run interest of firms. 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 counterparts. This paper uses aggregate bank balance sheet data to investigate systematic differences in the financial makeup and activities of universal and specialized banks. The paper first measures the rate of expansion and the ultimate magnitude of capital mobilized by the British and German banks. It then investigates the makeup of banks' asset portfolios and estimates the extent of direct involvement in equity ownership by the two types of banks. The findings suggest that, compared to the British banks, the German banks maintained at least as much liquidity relative to their short-term liabilities and held approximately the same (small) proportion of their assets in the form of non-government securities. Furthermore, the German banks seem to have held only a limited number of industrial equities in their portfolios and often did so merely because of insufficient markets for new issues. The findings suggest that the commonly-perceived gulf between specialized and universal banking may exaggerate the real differences in the systems' influences on economic growth and industrial development.

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