IDEAS home Printed from https://ideas.repec.org/p/gii/giihei/heidwp08-2010.html
   My bibliography  Save this paper

Hamlet Without The Prince of Denmark: Relationship Banking and Conditionality Lending In The London Market For Foreign Government Debt, 1815 - 1913

Author

Abstract

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.

Suggested Citation

  • Marc Flandreau, Juan Flores, 2010. "Hamlet Without The Prince of Denmark: Relationship Banking and Conditionality Lending In The London Market For Foreign Government Debt, 1815 - 1913," IHEID Working Papers 08-2010, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp08-2010
    as

    Download full text from publisher

    File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP08-2010.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lehmann, Erik & Neuberger, Doris, 2001. "Do lending relationships matter?: Evidence from bank survey data in Germany," Journal of Economic Behavior & Organization, Elsevier, vol. 45(4), pages 339-359, August.
    2. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and the World Economy, pages 225-236, National Bureau of Economic Research, Inc.
    3. Kenneth Kletzer & Mr. Barry J. Eichengreen & Mr. Ashoka Mody, 2003. "Crisis Resolution: Next Steps," IMF Working Papers 2003/196, International Monetary Fund.
    4. 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 1069-1087, September.
    5. 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.
    6. MARCELO De PAIVA ABREU, 2006. "Brazil as a debtor, 1824–19311," Economic History Review, Economic History Society, vol. 59(4), pages 765-787, November.
    7. Sexton, Jay, 2005. "Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era 1837-1873," OUP Catalogue, Oxford University Press, number 9780199281039.
    8. 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 259-275, March.
    9. 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.
    10. Flandreau, Marc & Flores, Juan-Huitzi, 2007. "Bonds and Brands : intermediaries and reputation in sovereign debt markets 1820-1830," IFCS - Working Papers in Economic History.WH wp07-12, Universidad Carlos III de Madrid. Instituto Figuerola.
    11. Irving Stone, 1999. "The Global Export of Capital from Great Britain, 1865–1914," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-333-98377-5.
    12. 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.
    13. 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.
    14. Barry Eichengreen and Richard Portes., 1988. "Settling Defaults in the Era of Bond Finance," Economics Working Papers 8885, University of California at Berkeley.
    15. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    16. Naomi R. Lamoreaux, 1994. "Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England," NBER Books, National Bureau of Economic Research, Inc, number lamo94-1.
    17. 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, May.
    18. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    19. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    20. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kim Oosterlinck & Loredana Ureche-Rangau & Jacques-Marie Vaslin, 2013. "Waterloo: a Godsend for French Public Finances?," Working Papers 0041, European Historical Economics Society (EHES).
    2. Oosterlinck, Kim & Ureche-Rangau, Loredana & Vaslin, Jacques-Marie, 2019. "Aristocratic Privilege. Exploiting “Good†Institutions," CEPR Discussion Papers 14071, C.E.P.R. Discussion Papers.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Flandreau, Marc & Flores, Juan, 2010. "Hamlet without the Prince of Denmark: Relationship banking and conditionality lending in the London market for government debt," CEPR Discussion Papers 7915, C.E.P.R. Discussion Papers.
    2. Marc Flandreau & Juan Flores, 2011. "Bondholders vs. bond-sellers? Investment banks and conditionality lending in the London market for foreign government debt, 1815-1913," Working Papers 0002, European Historical Economics Society (EHES).
    3. Masayo Shikimi, 2013. "Do firms benefit from multiple banking relationships? Evidence from small and medium- sized firms in Japan," International Economics and Economic Policy, Springer, vol. 10(1), pages 127-157, March.
    4. Yu, Hai-Chin & Sopranzetti, Ben J. & Lee, Cheng-Few, 2012. "Multiple banking relationships, managerial ownership concentration and firm value: A simultaneous equations approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 286-297.
    5. Doris Neuberger & Solvig Räthke, 2009. "Microenterprises and multiple bank relationships: The case of professionals," Small Business Economics, Springer, vol. 32(2), pages 207-229, February.
    6. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej [Bank-firm relationships in Poland in the light of data from bank reporting]," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.
    7. Hai-Chin Yu & Ben Sopranzetti & Cheng-Few Lee, 2015. "The impact of banking relationships, managerial incentives, and board monitoring on corporate cash holdings: an emerging market perspective," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 353-378, February.
    8. Andreani, Ettore & Neuberger, Doris, 2004. "Relationship finance by banks and non-bank institutional investors: A review within the theory of the firm," Thuenen-Series of Applied Economic Theory 46, University of Rostock, Institute of Economics.
    9. Fraser, Donald R. & Rhee, S. Ghon & Shin, G. Hwan, 2012. "The impact of capital market competition on relationship banking: Evidence from the Japanese experience," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 411-426.
    10. Giovanni Ferri & Doris Neuberger, 2014. "The Banking Regulatory Bubble and How to Get out of It," Rivista di Politica Economica, SIPI Spa, issue 2, pages 39-69, April-Jun.
    11. Mariarosaria Agostino & Francesco Trivieri, 2014. "Does trade credit play a signalling role? Some evidence from SMEs microdata," Small Business Economics, Springer, vol. 42(1), pages 131-151, January.
    12. Veronica Rappoport & Philipp Schnabl & Daniel Paravisini, 2015. "Comparative Advantage and Specialization in Bank Lending," 2015 Meeting Papers 499, Society for Economic Dynamics.
    13. Xu Chong Bo & Wenyi Li & Jing Shi & Yi Zheng & Qing Zhou, 2021. "Relationship lending and bank loan covenant violations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5847-5878, December.
    14. Ginés Hernández-Cánovas & Pedro Martínez-Solano, 2010. "Relationship lending and SME financing in the continental European bank-based system," Small Business Economics, Springer, vol. 34(4), pages 465-482, May.
    15. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    16. Paravisini, Daniel & Rappoport, Veronica & Schnabl, Philipp, 2023. "Specialization in bank lending: evidence from exporting firms," LSE Research Online Documents on Economics 119458, London School of Economics and Political Science, LSE Library.
    17. Belaid, Faiçal & Boussaada, Rim & Belguith, Houda, 2017. "Bank-firm relationship and credit risk: An analysis on Tunisian firms," Research in International Business and Finance, Elsevier, vol. 42(C), pages 532-543.
    18. A. Baglioni, 1995. "Incomplete contracts, renegotiation, and the choice between bank loans and public debt issues," The European Journal of Finance, Taylor & Francis Journals, vol. 1(3), pages 257-278.
    19. Shin, G. Hwan & Fraser, Donald R. & Kolari, James W., 2003. "How does banking industry consolidation affect bank-firm relationships? Evidence from a large Japanese bank merger," Pacific-Basin Finance Journal, Elsevier, vol. 11(3), pages 285-304, July.
    20. Doris Neuberger, 2005. "What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm," Finance 0510003, University Library of Munich, Germany.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gii:giihei:heidwp08-2010. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dorina Dobre (email available below). General contact details of provider: https://edirc.repec.org/data/ieheich.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.