English industrial distress before 1914 and the response of the banks

Abstract

Internal bank archives are used to examine the nature of English bank/firm relationships during periods of business distress in the decades before 1914. The performance of the banks is examined in the context of theoretical assertions regarding relationship and transaction banking and bank response to the problems of adverse selection and moral hazard. New estimates of bank losses on industrial accounts are made. The results indicate that the banks supported their industrial clients during periods of distress by continuing with existing loans but rarely became deeply involved with clients' business. Effective screening of loan applications, the use of short-term loans and of sample collateral stipulations safeguarded against moral hazard and minimised losses for the banks, even with such high risk accounts.