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Hamlet without the Prince of Denmark: Relationship banking and conditionality lending in the London market for government debt, 1815-1913

  • Flandreau, Marc
  • Flores Zendejas, Juan Huitzilihuitl

This paper offers a theory of conditionality lending in 19th-century international capital markets. We argue that ownership of reputation signals by prestigious banks rendered them able and willing to monitor government borrowing. Monitoring was a source of rent, and it led bankers to support countries facing liquidity crises in a manner similar to modern descriptions of “relationship” lending to corporate clients by “parent” banks. Prestigious bankers’ ability to implement conditionality loans and monitor countries’ financial policies also enabled them to deal with solvency. We find that, compared with prestigious bankers, bondholders’ committees had neither the tools nor the prestige required for effectively dealing with defaulters. Hence such committees were far less important than previous research has claimed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7915.

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Date of creation: Jul 2010
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Handle: RePEc:cpr:ceprdp:7915
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  1. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, 04.
  2. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
  3. Marc Flandreau & Juan H. Flores, 2007. "Bonds and Brands : intermediaries and reputation in sovereign debt markets 1820-1830," Working Papers in Economic History wp07-12, Universidad Carlos III, Instituto Figuerola de Historia y Ciencias Sociales.
  4. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2010. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815-2007," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 53-92 National Bureau of Economic Research, Inc.
  5. Michael Tomz & Mark L. J. Wright, 2007. "Do countries default in “bad times”?," Working Paper Series 2007-17, Federal Reserve Bank of San Francisco.
  6. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  7. MARCELO de PAIVA ABREU, 2006. "Brazil as a debtor, 1824-1931 -super-1," Economic History Review, Economic History Society, vol. 59(4), pages 765-787, November.
  8. Flandreau, Marc, 2003. "Crises and Punishment: Moral Hazard and the Pre-1914 International Financial Architecture," CEPR Discussion Papers 3742, C.E.P.R. Discussion Papers.
  9. English, William B, 1996. "Understanding the Costs of Sovereign Default: American State Debts in the 1840's," American Economic Review, American Economic Association, vol. 86(1), pages 259-75, March.
  10. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  11. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  12. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
  13. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  14. Mauro, Paolo & Sussman, Nathan & Yafeh, Yishay, 2007. "Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870-1913 and Today," OUP Catalogue, Oxford University Press, number 9780199226139, March.
  15. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
  16. Rui Pedro Esteves, 2007. "Quis custodiet quem? Sovereign Debt and Bondholders` Protection Before 1914," Economics Series Working Papers 323, University of Oxford, Department of Economics.
  17. Erik Lehmann & Neuberger, Doris, 2000. "Do Lending Relationships Matter? Evidence from Bank Survey Data in Germany," CoFE Discussion Paper 00-04, Center of Finance and Econometrics, University of Konstanz.
  18. Namsuk Kim & John Joseph Wallis, 2003. "The Market for American State Government Bonds in Britain and the United States, 1830-1843," NBER Working Papers 10108, National Bureau of Economic Research, Inc.
  19. Olivier Accominotti & Marc Flandreau & Riad Rezzik, 2011. "The spread of empire: Clio and the measurement of colonial borrowing costs," Economic History Review, Economic History Society, vol. 64(2), pages 385-407, 05.
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