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Universal banking failure?: an analysis of the contrasting responses of the Amsterdamsche Bank and the Rotterdamsche Bankvereeniging to the Dutch financial crisis of the 1920s

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  • Colvin, Christopher Louis

Abstract

Whilst in some financial systems in the early twentieth century commercial and investment banking activities were carried out by functionally separate firms, in others both kinds of operation were conducted under one roof by “universal banks”. Explaining the evolutionary paths that lead to these divergent banking structures has remained a hot topic of multidisciplinary debate for many years. So has their respective exposure to financial crises. On the one hand, universal banks – which hold both long- and short-term assets – are able to reduce information asymmetries and internalise risk. But on the other hand, their mixed asset structure arguably decreases versatility during an economic downturn and may create a “dual market for lemons” in which information asymmetries cause financially sound clients and banks to exit the market, leaving only the riskier crisis-prone ones behind. This paper analyses these debates using the case study of the Netherlands in the early 1920s. The literature argues that it is during this decade that the Netherlands experienced her one and only traditional banking crisis from 1600 to the present day, and after which her short-lived experiment with a system of universal banking came to an end. By calculating an equity-deposit ratio panel for the Big Five Dutch banks, this paper attempts to measure to what degree the sector evolved to become universal and subsequently returned to functional separation. It then conducts a matched pair comparison of two similar-sized banks operating in the Netherlands in the 1920s: the Amsterdamsche Bank and the Rotterdamsche Bankvereeniging. Whilst the first escaped the crisis relatively unscathed, the second required assistance from the Nederlandsche Bank, the Dutch central bank. A new and detailed narrative of one episode of the crisis using as yet unused primary sources is developed for this comparison. This paper finds that the Rotterdamsche Bankvereeniging was more universal than her Amsterdam rival. It concludes that it was primarily this difference that caused her to suffer during the crisis. However, it does so with caution in view of the paucity of data to hand and methodological restrictions.

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  • Colvin, Christopher Louis, 2007. "Universal banking failure?: an analysis of the contrasting responses of the Amsterdamsche Bank and the Rotterdamsche Bankvereeniging to the Dutch financial crisis of the 1920s," Economic History Working Papers 22320, London School of Economics and Political Science, Department of Economic History.
  • Handle: RePEc:ehl:wpaper:22320
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    References listed on IDEAS

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    1. Ark, Bart van & Jong, Herman de, 1996. "Accounting for economic growth in the Netherlands since 1913," GGDC Research Memorandum 199626, Groningen Growth and Development Centre, University of Groningen.
    2. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters,in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
    3. Ramírez, Carlos D., 1999. "Did Glass-Steagall Increase the Cost of External Finance for Corporate Investment?: Evidence From Bank and Insurance Company Affiliations," The Journal of Economic History, Cambridge University Press, vol. 59(02), pages 372-396, June.
    4. Verdier, D., 1997. "Universal Banking and Bank Failures Between the Wars," Papers 97/11, European Institute - Political and Social Sciences.
    5. Bebczuk,Ricardo N., 2003. "Asymmetric Information in Financial Markets," Cambridge Books, Cambridge University Press, number 9780521793421, April.
    6. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Banking Scope and Financial Innovation," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1099-1131.
    7. Feinstein, Charles H. & Temin, Peter & Toniolo, Gianni, 1997. "The European Economy Between the Wars," OUP Catalogue, Oxford University Press, number 9780198774815.
    8. Timothy W. Guinnane, 2002. "Delegated Monitors, Large and Small: Germany's Banking System, 1800–1914," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 73-124, March.
    9. repec:dgr:rugggd:199626 is not listed on IDEAS
    10. Randall K. Morck, 2005. "A History of Corporate Governance around the World: Family Business Groups to Professional Managers," NBER Books, National Bureau of Economic Research, Inc, number morc05-1, January.
    11. Fohlin, Caroline, 1999. "Universal Banking in Pre-World War I Germany: Model or Myth?," Explorations in Economic History, Elsevier, vol. 36(4), pages 305-343, October.
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    Cited by:

    1. Colvin, Christopher L. & de Jong, Abe & Fliers, Philip T., 2015. "Predicting the past: Understanding the causes of bank distress in the Netherlands in the 1920s," Explorations in Economic History, Elsevier, vol. 55(C), pages 97-121.
    2. Colvin, Christopher L., 2015. "The past, present and future of banking history," QUCEH Working Paper Series 15-05, Queen's University Belfast, Queen's University Centre for Economic History.

    More about this item

    JEL classification:

    • N0 - Economic History - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925

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