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rfs%2Fhhx044
Nothing Special About Banks: Competition
and Bank Lending in Britain, 1885–1925
Fabio Braggion
Tilburg University and CentER
Narly Dwarkasing
Institute for Finance and Statistics, University of Bonn
Lyndon Moore
We investigate the impact of increasing bank concentration on bank loan contracts in a
lightly regulated environment that allows us to abstract from possible confounding effects
of regulation and focus on the "pure" effects of competition on bank lending. We study
over 30,000 British bank loans over the period 1885 to 1925. Borrowers in counties with
high bank concentration received smaller loans and posted more collateral than borrowers
in other counties. In high concentration counties, the quality of loan applicants improved,
suggesting that banks restricted credit, not that the quality of loan applicants had worsened.
(JEL G21, N23)
Received February 4, 2016; editorial decision December 20, 2016 by Editor Philip Strahan.
The effects of bank concentration on credit extension and the economy are
complicated. Contemporary bank mergers, the usual path to a concentrated
banking system, are politically sensitive issues in most countries. Such mergers
are usually strictly vetted by national (and, sometimes, state) regulators. In their
We thank the archivists at Barclays, HSBC, Lloyds, and the Royal Bank of Scotland (RBS) for graciously
providing us with access to their internal records. Philip Strahan (the editor), two anonymous referees, Tobias
Berg, Fabio Castiglionesi, Ralph De Haas, Valeriya Dinger, Joost Driessen, Miguel Ferreira, Neal Galpin,
Leslie Hannah, Joseph Haubrich, Martin Hellwig, Benjamin Klaus, David Laibson, Marcella Lucchetta, Alberto
Manconi, Robert Marquez, David Martinez-Miera, Kris Mitchener, Steven Ongena, George Pennacchi, and
Salvatore Piccolo; seminar participants at the Australian National University, University of Bonn, Université
Libre de Bruxelles, Judge Business School, Catholic University of Milan, Max Planck Institute, Yale University,
and the University of Zurich; and participants at the 5th Research Workshop in Financial Economics, the 2016
EBC Network Conference, the 2016 CREDIT conference, the 2016 EEA Conference, 2016 FIRS, and the
2016 International Rome Conference in Banking and Finance provided helpful suggestions. The Netherlands
Organization for Scientific Research (NWO) generously supported Braggion through its VIDI Grant Program
and Dwarkasing through its Mozaïek Grant Program during the writing of this paper. Moore would like to thank
the Faculty of Business and Economics at the University of Melbourne for financial support. Lisa Gardner, Owen
Horton, Patrick McGauley, Zoi Pittaki, Iida Saarinen, Beatriz Rodriguez Satizabal, Pamela Schievenin, Emily
Stammitti, Marc di Tommasi, and Alex Wheeler provided excellent research assistance. Send correspondence to
Lyndon Moore, University of Melbourne, 198 Berkeley St, Carlton, 3053, Australia; telephone +61 390356566.
© The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies.
All rights reserved. For Permissions, please e-mail: [email protected]
doi:10.1093/rfs/hhx044
Advance Access publication May 17, 2017
[14:57 1/9/2017 RFS-hhx044.tex]
Nothing Special About Banks
everyday activities, banks are regulated by a maze of rules and guidelines.
For example, at the start of 2014, the United States had 18 bank regulatory
authorities, which together had issued 8,872 pages of regulations.1
The high, and changing, degree of regulation in contemporary financial
markets makes empirical conclusions about the effect of concentration on the
economy hard to interpret, as regulation can affect both the degree of banking
concentration and the behavior of banks and borrowers. Regulation may impact
the workings of the financial system directly (e.g., a minimum capital ratio must
be adhered to) or indirectly (e.g., managers, borrowers, and depositors may
adjust their behavior following a change to minimum capital ratios). Hence,
any contemporary study of bank competition and lending runs the risk that
the results could be influenced by regulatory issues. We resolve this issue by
studying the laissez-faire British economy at the turn of the twentieth century,
when banking regulation was minimal and infrequently changed. Although
advances in technology and financial innovation (e.g., Paypal, P2P lending)
have clearly taken place since the early twentieth century, the basic banking
issue of sourcing funds to extend loans has not changed.
We construct a data set of over 30,000 loans granted by 43 English and
Welsh banks between 1885 and 1925. We observe various loan characteristics:
the amount, duration, interest rate of the loan, and the collateral posted. We
complement this information with balance sheet data for all banks that operated
in England and Wales during our sample period, not just the 43 for which we
have loan data. We relate county-level banking concentration to bank loan
extensions and risk-taking.
In the little regulated British market, we find results consistent with the
traditional view of bank concentration, whereby a decrease in competition is
harmful for borrowers and leads banks to pursue safer investment strategies. In
counties characterized by high banking concentration, banks granted smaller
loans and demanded higher collateral. A one-standard-deviation increase in
the county Herfindahl index of banking concentration leads to a 15%-25%
decrease in the value of loans granted to a customer, and a 25% increase in the
collateral to loan ratio. As bank concentration increased in a county, the quality
(as internally assessed by the bank) of successful loan applicants also improved,
which suggests that the banking oligopoly restricted credit to marginal loan
applicants, rather than the oligopoly induced riskier borrowers to take out loans.
We confirm our loan-level results with an analysis of all banks' balance
sheets, not just those whose loan records we have collected. Banks that mainly
operated in highly concentrated counties invested more in safe securities and
lent less to entrepreneurs and households. A one-standard-deviation increase
in the market concentration faced by a bank increased that bank's holdings of
safe, marketable securities by almost 50% and decreased loans by 12%.
1 See Code of Federal Regulations, 2014 edition, U.S. Government Printing Office.
The Review of Financial Studies / v 30 n 10 2017
The local degree of banking concentration could be correlated with omitted
factors likely to affect the loan terms granted to borrowers. Our historical setting
however allows us to construct an instrumental variable analysis based on the
local deposit (rather than lending) market that we detail later.
A study of the British financial system between 1885 and 1925 has several
advantages compared to studies that rely on a more contemporary setting. We
first analyze banking in a setting without bank supervision, mandatory capital
ratios, deposit insurance, or merger legislation. From 1858 onward, banks
were, according to Grossman (2010, 183): "essentially governed by corporation
law."2 Government-sponsored bank bailouts did not take place in this era. The
Bank of England (which was privately owned at the time) did participate in two
bank rescue packages, but both of these were coordinated and mostly funded
by commercial banks, not the government.
The unregulated environment is important, as it removes any confounding
effect that regulation may generate. To take one example, contemporary bank
mergers in the United States were facilitated by "good citizenship" under the
Community Reinvestment Act (CRA) (Calomiris and Haber 2014, 216–22).
The CRA required banks to pledge a certain amount of lending to low credit
rating borrowers in order to obtain regulatory approval for a merger. Agarwal
et al. (2012) document that U.S. banks increased lending in CRA-tracts around
the time of regulatory exam dates. As a result, if there is a decline in competition
at the same time as riskier bank lending, it is difficult to disentangle whether
this is purely due to competitive pressures or the effect of the CRA regulation.3
Recent regulations imposed on banks in developed economies may exacerbate
the confounding effect. Large banks (or banks considered globally systemically
important) are now regulated differently from small banks (Moenninghoff,
Ongena, and Wieandt 2015). To the extent that large banks are more likely
to operate in less competitive banking systems, it is difficult to understand to
what extent lending practices are the results of the special regulation vis-à-vis
market competition.
A second benefit is that we study bank concentration and lending within a
bank merger wave. The share of deposits held by the largest ten banks in the
United Kingdom rose from 33% in 1880 to 74% in 1920 (Capie and RodrikBali 1982).4 The merger wave generated large time-series and cross-sectional
variation in local banking concentration. In contrast, the U.S. bank merger
2 Formal supervision by the Bank of England only began with the Bank Act of 1979. Deposit insurance was
introduced in 1982 (Saunders and Wilson 1999).
3 Deposit insurance may have a similar confounding effect. Banks may choose to invest in risky assets in order
to exploit the put options embedded in a deposit insurance scheme (Merton 1977). Riskier investment strategies
may be reflected in banks' M&A policies; for instance, banks may acquire other riskier banks. This strategy
would both reduce local competition and increase the risk profile of the acquiring bank. Moreover, the lack of
regulation in the U.K. market at the turn of the twentieth century also means that there was little need to bribe
officials to obtain banking permits and licenses (Shleifer and Vishny 1993).
4 The high degree of market concentration observed in today's U.K. market has its roots in the early twentieth
century (UK Competition Commission Report, 2001).
wave of the 1990s raised the national level of concentration but left the local
level little changed (Rhoades 2000; Pilloff 2004). Larger variation in local
concentration makes it easier to identify the connections between changes in
local concentration and lending.
A third advantage of our study is that, due to the passage of time, records
that are not typically available for studies of banking are available to us. In
particular, together with loans granted to individuals and companies, we also
record any comments made by the bank concerning the quality of the borrower,
which were the precursors to modern internal credit ratings.
The debate on whether a concentrated or dispersed banking market better
serves the economy has not been resolved. The traditional argument has been
that concentration is bad for borrowers, since banks exert market power to raise
loan interest rates and restrict the supply of credit (Klein 1971; Monti 1972;
Pagano 1993; Guzman 2000). Berger and Hannan (1989), Hannan (1991), and
Hannan and Prager (1998) show that a more concentrated banking market leads
to lower deposit rates for bank customers. Carlson and Mitchener (2009) show
that increased competition arising from new bank branches during the 1920s led
incumbents to become more efficient, extend more loans, and be more likely to
survive the Great Depression. Canales and Nanda (2012) find that decentralized
banks in Mexico restrict credit when they have market power.
In contrast, theories of information asymmetry indicate that a more
concentrated banking market may be good, at least for younger firms, or firms
that operate with new technologies (Petersen and Rajan 1995). Marquez (2002)
finds that in a more concentrated banking market the interest rate charged on
loans is lower since larger banks are more effective at screening borrowers.5
Our environment also helps to test these theories since we study banking in a
period of technological change, the so-called "second Industrial Revolution"
(Mokyr 1992; Braggion and Moore 2013). We test whether the effects of bank
concentration were different for firms that worked in the "NewTech" sector
(e.g., electricity) than for the traditional sectors (e.g., railways or textiles) where
asymmetric information was less pronounced.
We measure the degree of local banking concentration at the historic
county level. For each county we construct annual values of the HirschmannHerfindahl index, County HHI, based on the distribution of all bank branches
in England and Wales that existed at the time, not just those whose
descendants have survived until today.6 Clearly, our county measure of banking
5 Cetorelli and Gambera (2001) show that higher bank concentration is good for small firms that are dependent
on external finance, although the aggregate effect of concentration is slower economic growth. Bonaccorsi and
Dell'Ariccia (2004) show that in Italian provinces with a more concentrated banking sector there is faster creation
of new firms. Zarutskie (2006) finds that following the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, which increased the competitiveness of U.S. banking markets, young firms were less likely to
use debt to finance their investments. In contrast, Degryse and Ongena (2007) report that in more concentrated
markets there is less, rather than more, relationship banking.
6 We do not observe assets or liabilities at the branch level.
concentration may be endogenous. However, the micro dimension of our data
allows us to run specifications controlling for either county or borrower fixed
effects. Fixed effects mitigate concerns that our results are due to some omitted
factors that jointly determine banking concentration and lending.
We further attempt to alleviate endogeneity problems by exploiting
the historical setting. We use an instrumental variable for local banking
concentration: the number of Post Office Saving Banks (POSBs) in a county
in 1885. POSBs were established in 1861 with the intention of teaching the
working classes to entrust their savings to financial institutions rather than
keeping their savings at home (see the Treasury survey of 1875, as reported by
Horne 1947, 228–31).
Our identification assumption is that, after we control for local population,
local income, and literacy, the number of POSBs in a county captures features
of the local deposit market (but not of the lending market) that may have
affected the degree of commercial bank competition. First, POSBs were only
allowed to take deposits, but not to make loans; their deposits were brought
to London and used to retire Treasury bonds. This institutional feature reduces
the possibility that the distribution of their network may directly affect local
lending practices. Second, POSBs may not have been able to absorb all the
savings available in a certain geographical area, as the law imposed strict limits
on the amount of deposits per customer they could accept. As a result, their
geographical distribution is unlikely to greatly depend on local income, a factor
that may also directly affect lending. Since the amount of deposits POSBs
could collect was capped, they did not have strong incentives to open new
branches in response to a positive income shock. Third, POSBs were located in
the same building as post offices. Most post offices locations were established
between the eighteenth and the nineteenth centuries and they are predetermined
in our time period. The distribution of post offices essentially depended on mail
volume, which is related to population, a variable we control for.
At the same time, a large number of POSBs may have reduced the entry costs
in the local area for commercial banks, as they contributed to the education of
the population in the use of banking services. In this way, a high number of
POSBs in a county signaled an attractive deposit market for commercial banks,
which led them to enter the market and offer banking services. This conjecture is
confirmed by our first stage regressions that show that a larger number of POSBs
in a county were associated with lower commercial banking concentration.
Fourth, to address concerns about county homogeneity and measurement
of bank concentration at the county level, we examine loans made in London
and Birmingham, the two largest cities. Bank branches that are further from
competing branches make smaller loans at higher interest rates for shorter
durations.
Our conclusion, that borrowers in more concentrated markets receive worse
loan terms, is consistent with two competing theories. On the one hand, loan
applicants with riskier projects could be those who are more likely take loans in
more concentrated markets, with the result that banks rationally charge higher
interest rates and demand more collateral as protection (Boyd and De Nicoló
2005). On the other hand, banks may use their market power to restrict the
supply of loans, which cuts off the funding to marginally profitable borrowers,
and leaves only the best quality borrowers to be served. To disentangle these
two explanations we look at the comments that banks' loan officers made
about their borrowers. Such comments provide the loan officers' assessment
of the character and trustworthiness of the borrower. If riskier borrowers
were more likely to take loans in concentrated banking markets, we would
expect deterioration in the quality of the average borrower; if the market
power explanation is correct, we might see banks granting loans to higher
quality borrowers. We employ linguistic software and also personally read the
comments to generate scores indicating the degree of positivity and negativity
embedded in each comment. We then relate these scores to the local degree of
banking concentration. In more concentrated areas, the perceived quality of the
borrower is higher; a result that lends support to the market power explanation.
Although we have collected a large number of loan records, we cannot be
sure that our sample of loans is a random sample of the entire population
of loans granted in England and Wales at the turn of the twentieth century.7
To overcome this problem, we analyze the balance sheet ratios of all British
banks that existed in our time period, and we relate the ratios to the degree of
concentration in the banks' main county of operation. While this test does not
allow us to control for a range of fixed effects and borrower characteristics, it
does not suffer from selection bias. Balance sheet results confirm the findings
of the loan analysis. Banks that operated in areas with less competition had a
lower loans to assets ratio and they invested more heavily in liquid and safe
assets, such as Treasury bonds and railway preference shares.
In sum, our results provide support for the classical view of banking
concentration whereby banks offer tougher lending terms when they face higher
market concentration. At the same time, the increased concentration in the U.K.
market led to banks holding a less risky portfolio of assets. Making a full welfare
statement about whether the benefits of increased financial stability more than
offset the costs of oligopoly pricing is beyond the scope of this study. Our
work can however provide a basis to understand the behavior of large financial
institutions. Merger waves in the 1980s and 1990s created very large financial
institutions and less competitive banking systems in many developed countries.
The experience of the 2007–2008 financial crisis has led various policy makers
to advocate the breakup of large banks, as, via their investment strategies, they
are believed to constitute a danger to financial stability.8 However, our results
7 The amount and quality of our loan data depend on the availability of the original records in the archives of
Lloyds, Barclays, HSBC, and RBS.
8 The degree of banking concentration is a matter of concern for current policy makers. U.S. presidential candidate
Bernie Sanders argues that, "how you go about doing it [breaking up big banks] is having legislation passed, or
suggest that, absent regulation, more concentrated banking systems yield a
safer financial system. The adverse effects of high bank concentration is that
banks may apply oligopoly pricing and restrict credit to entrepreneurs. Policy
makers, who wish to create a more stable banking system, should take into
account which element(s) in current regulation lead large banks to undertake
risky investments, rather than concentration per se.
Our work also provides empirical evidence on alternate theories that relate
the level of banking concentration to risk-taking. On the one hand, several
theoretical papers argue that increased market concentration leads banks to
embark on safer business strategies (Smith 1984; Keeley 1990; Besanko and
Thakor 1993; Hellmann, Murdock, and Stiglitz 2000; Matutes and Vives 2000;
Repullo 2004). The main reason for this is that greater market power increases
the value of a bank franchise (or the "charter value"). This increases the cost to a
bank of failing and leads it to act more prudently. On the other hand, other studies
emphasize that banks in uncompetitive markets are more likely to originate
risky loans. For instance, Mishkin (1999) argues that banks in concentrated
systems are more likely to be subject to "too big to fail" policies that encourage
risk-taking behavior by bank managers. Boyd and De Nicoló (2005) argue that
by increasing lending rates, banks in less competitive markets exacerbate moral
hazard problems with their borrowers, which induces borrowers to undertake
riskier projects. As a result, banks that face less competition hold riskier loans
in their portfolios.9
A related set of works look at the various stages of U.S. banking deregulation
and their effects on banks' lending, entrepreneurship, merger and acquisitions
(M&As), and economic growth (Jayaratne and Strahan 1996; Black and Strahan
2002; Kerr and Nanda 2009; Erel 2011; Rice and Strahan 2010). These papers
study the effects of the deregulation of branching restrictions, while some
elements of banking regulation were kept in place (e.g., deposit insurance,
capital ratios, and bank supervision) and others were changing (e.g., the gradual
giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the
economy over the problem of too-big-to-fail" (interview with NY Daily News, April 1, 2016). Minneapolis Federal
Reserve President Neel Kashkari recommended in 2016 that, "I believe we must . . . give serious consideration
to a range of options, including . . . breaking up large banks into smaller, less connected, less important entities.
Many argue that large banks benefit society by creating economies of scope and scale. No doubt this is true—but
cost/benefit analyses require understanding costs, too." Available at https://www.minneapolisfed.org/news-andevents/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail.
9 A large number of studies have tested these competing hypotheses (see Berger et al. 2004 for a survey). Using
concentration as a proxy for banks' market power, De Nicoló et al. (2004) show that systems that are more
concentrated are more likely to experience crises. In contrast, Beck, Demirguc-Kunt, and Levine (2006) present
evidence that concentrated banking systems are more stable. Beck, De Jonghe, and Schepens (2013) relate
banking competition with country institutional features and find that competitive banking systems are more
fragile in countries with stricter activity restrictions, better developed stock exchanges, and more generous
deposit insurance. Schaeck, Cihak, and Wolfe (2009) find, in a cross-country analysis, that more competitive
banking systems are less likely to experience a systemic crisis. Berger et al. (2008) relate various measures of
banking competition in 23 countries to several proxies of risk-taking, and they find that banks with a higher
degree of market power also have less overall risk exposure. Martinez-Miera and Repullo (2010) present a
unified framework in which they combine both the "charter value" hypothesis and the Boyd and De Nicoló
(2005) model.
weakening of Glass-Steagall in the 1980s and 1990s). We abstract from most
forms of regulation to cleanly test how competition, and only competition,
relates to bank behavior.
1. British Banking Market
We consider the banking system of England and Wales from 1885 until 1925.
Scotland and Ireland were subject to different banking laws and those markets
were not integrated with England and Wales. These distinct markets are still
in existence today (U.K. Competition Commission Report 2001). In 1885, the
British banking system was still largely unregulated (Grossman 2010). Banks'
lending and underwriting practices were not restricted, and limits on capital,
branching, and deposit insurance did not exist.10 Limited liability incorporation
was permitted for banks after 1858 (Grossman 2010, 183; Turner 2014, 124),
and the Companies Act of 1879 required audited financial statements from
banks.11 The lack of regulation in England and Wales stands in contrast to the
heavily regulated U.S. market. In the United States, banking regulation had
become entrenched following passage of the National Bank Act of 1864, when
a regulator, the Office of Comptroller of the Currency, was established.12
Whether or not the Bank of England would come to the aid of a bank
in crisis was unclear ex ante. Investors were aware that bank failures could
occur (Goodhart and Schoenmaker 1995) and several small public banks
failed, without intervention by the government, during the 40-year period we
consider.13 The City of Glasgow Bank was also allowed to fail in 1878. On
the other hand, the Bank of England facilitated a private sector response for
Barings Bank during its crisis in 1890, although whether this was a bank bailout,
as currently understood, is still debated (Ferguson 2008; Eichengreen 2008;
Cassis 1994). All joint-stock banks hastily invoked limited liability protection
soon after the failure of the City of Glasgow Bank, and all bank shareholders
in our sample are covered by limited liability. Depositors were protected by
the use of 'reserve liability' (that could only be called in time of crisis) as well
as partly paid shares that were callable by the bank at will. Importantly, these
provisions were set up by banks themselves and not mandated by regulation
(Turner 2014, 102–3).
10 Private banks were not even required to be registered before passage of the Private Banks Act of 1892.
11 The alternatives to joint-stock and private banks were trustee savings banks, building societies, or the POSB
system. These alternative financial institutions catered to small depositors, comprised a small part of total
deposits, and paid a fixed interest rate (Mackenzie 1932, 42–44). The building society sector, the largest domestic
competitor for the commercial banks, was less than 10% of the size of the banking sector (see Report of the
Chief Registrar of Friendly Societies for the year 1925).
12 The largest five U.S. banks held under 10% of all deposits in 1880. The fraction held by the largest five declined
over time (Fohlin and Jaremski 2015).
13 These include London and General Bank in 1892, Dumbell's Bank in 1900, Carlton Bank in 1901, Cheque Bank
in 1901, Economic Bank in 1905, London Trading Bank in 1910, Birkbeck Bank in 1911, and Civil Service Bank
In 1870, 387 banks were operating in England and Wales (Capie and RodrikBali 1982). British banks were mainly commercial banks involved in various
types of business activities: They provided short-term credit to local firms and
attracted deposits.14 Only domestic banks operated branch networks within
England and Wales, although many foreign banks had a single branch in
London.15
Towards the end of the nineteenth century the British banking industry
experienced considerable growth in M&A activity. Between 1870 and 1921,
264 bank mergers (or "amalgamations" as contemporaries referred to them)
occurred. By 1920, only 75 banks were left in the United Kingdom, of which
just 20 were English or Welsh public (also known as joint-stock) banks (Capie
and Rodrik-Bali 1982; The Economist's Banking Supplement)).16
The merger wave was mostly characterized by London-based banks (and
provincial banks that had relocated to London) taking over other banks (Sykes
1926). Large provincial banks, such as Barclays, Lloyds, and Midland Bank,
took over London-based banks that were members of the clearing house (to
obtain clearing house membership), and then subsequently relocated to London.
Over the period 1885 to 1905, takeovers of private and small targets were
more common and the two merging banks' branch networks were usually
geographically diverse.
The British consolidation process was almost entirely driven by voluntary
mergers, although a few smaller banks were taken over while in financial
distress. The result of this process was the emergence of the "Big Five"
banks in Britain by 1918: Barclays, Lloyds, Midland, National Provincial, and
Westminster. The concentration of banking power generated fears of increased
monopoly power in the financial industry. The Treasury Committee report
stated that, "there is at present no idea of a Money Trust [although] it appears
to us not altogether impossible that circumstances might produce something
approaching to it at a comparatively early date."
Scholars have defined the British banking industry, after the merger wave
was complete, as: "a highly cartelized and rigid system" (Griffiths 1973; Capie
and Billings 2004). The British oligopoly situation has lasted, with many of the
same participants, until today. The U.K. Competition Commission report (2001)
14 In contrast to German banks British banks did not purchase large equity stakes in industrial concerns, nor would
they formally lend at long durations (Fohlin 1998; Collins and Baker 2003). However, on many occasions both
banks and clients anticipated that overdraft limits would be routinely renewed (Collins and Baker 2013, 194).
15 In addition, English and Welsh banks did not operate branches abroad (with the exception of two or three branches
just north of the Scottish border). Very large banks set up some small subsidiaries in Europe in the early 1910s,
but no serious foreign expansion was undertaken until after the end of World War One (Jones 1982).
16 Part of the rationale for the U.K. merger wave was technological progress. Financial and general journalism, along
with improved accounting techniques and the widespread publication of balance sheets, increased in popularity
(Ackrill and Hannah 2001, 49–50). These factors provided broader access to information for prospective lenders.
The expansion of railways, telegraph, and (later) telephone lines and the spread of head office "best practice"
managerial techniques (Collins and Baker 2003, 107–11) brought the various British provinces "closer" to
London. These technological improvements offered a head office greater control over a dispersed branch network.
British bank deposit concentration, 1870-1920
Top ten banks
Top five banks
Sum of the largest banks' deposits divided by the sum of all banks' deposits.
Source: Table 3 in Forrest Capie & Ghila Rodrik-Bali (1982) Concentration in British Banking 1870–1920,
Business History, 24:3, 280-292, Taylor & Francis Ltd, www.tandfonline.com
British banking Herfindahl index, 1870-1920
Sum of squared market shares. Market share of a bank is equal to its
deposits divided by aggregate deposits.
Source: Table 4 in Forrest Capie & Ghila Rodrik-Bali (1982)
Concentration in British Banking 1870–1920, Business History, 24:3,
280-292, Taylor & Francis Ltd, www.tandfonline.com
investigated bank lending to small and medium-sized enterprises. The report's
findings (point 1.9) were that, "the four largest clearing groups—Barclays,
HSBC, Lloyds TSB and RBSG—are together charging excessive prices . . .
and therefore making excessive profits, in England and Wales, of about £725
million a year."
Table 1 shows that in 1880 the top five banks in England and Wales held
26.4% of deposits. This figure increased to 80% by 1920, while the deposit
share of the top ten banks rose from 36.2% to 96.6%. A Herfindahl index based
on deposits, one measure of industry concentration, increased from 0.020 in
1880 to 0.125 in 1920 for England and Wales (see Table 2). In 1880, the U.K.
banking system resembled the dispersed system of Germany in the late 1990s
(see Table 3), whereas by 1920 the British system was closer to countries that
have a high contemporary degrees of concentration, such as Belgium and the
Braggion, Dwarkasing, and Moore (2015) describe the behavior of countylevel Herfindahl indexes in England and Wales between 1885 and 1925. Most
of the counties experienced an increase in banking concentration. However, in
a few counties banking concentration remained unaltered or even decreased.
This result is in stark contrast with the recent experience in the United States,
where, despite the intense merger activities during the 1990s, the concentration
of local banking has not systematically increased.
European banking Herfindahl index, 1995-2001
Herfindahl
Sum of squared market shares. Market share of a bank
is equal to its deposits divided by aggregate deposits.
Source: Adapted from Table 1 in Carbó et al (2009)
Cross-country comparisons of competition and pricing
power in European banking, Journal of International
Money and Finance 28:115-134, with permission from
Elsevier.
2. Empirical Method
2.1 Baseline regression
To test the effect of a shift in concentration on loan conditions empirically, we
estimate the following baseline regression:
Yi,j,k,t = α +αk +αt +αj +βCounty HHIj,t−1 +Controlsi,j,k,t +εi,j,k,t .
Yi,j,k,t indicates the size of loan i granted by a branch located in county j of
bank k in year t; whether loan i was secured by collateral (0/1 variable), its
spread over the Bank of England rate, its collateral over loan ratio, and its
duration. County HHI is the main independent variable, constructed annually
by county:
Number of Brancheskj t
k=1 Number of Brancheskj t
k=1
County HHI measures the Herfindahl index of industry concentration at the
county level. The closer the index is to one, the closer the local market structure
is to monopoly.17 We use (a combination of) fixed effects for bank (αk ), year
(αt ), and county (αj ). In many specifications, we also control for borrower
fixed effects. In those cases, we do not use bank and county fixed effects, as
they are collinear with the borrower fixed effects.
To control for other factors that may affect our loan conditions we include
an exhaustive set of control variables at the loan, bank, and county level. We
consider whether loan i is a renewal or not, whether it is an overdraft, and the
17 While the Herfindahl index has been widely used as a proxy of competition, it suffers from various drawbacks,
and it may overestimate the degree of monopoly power enjoyed by market participants. For instance, a system
with only two banks, to which the Herfindahl index will attribute an almost monopoly score, could still be very
competitive if the banks compete á la Bertrand. Other competition proxies, based on profitability measures,
might be able to overcome this problem (Lerner 1934). However, it is virtually impossible for us to construct
a competition measure based on banks' profitability, as our study looks at local market competition (within a
county or a city) for which profit and loss statements are not available.
number of previous loans a bank customer had obtained from the bank at the
moment of the origination of the loan. The latter variable is a rough proxy of
the strength of the relationship between the bank and the customer.
We also include bank-level controls, in particular the number of bank
branches as a proxy for the size of the bank, return on assets (ROA) as a
measure of profitability, and deposits scaled by assets as a measure of the
bank's leverage. Also, to control for any differences in lending practices by
rural versus urban branches, we include an indicator that identifies whether or
not a branch was in a metropolitan area.18 At the borrower level, we control for
various borrower characteristics: a borrower's gender, occupation, and whether
the borrower is a business or an individual. At the county level, we include the
log of the county's population and the employment over population ratio as
controls. When the specifications do not allow us to control for county fixed
effects, we also include the degree of county literacy in 1885 (as a broad measure
of local human capital).
2.2 Instrumental variable analysis
Bank concentration (County HHI) could affect credit extension directly.
However, a natural concern is that all financial and economic factors are jointly
determined or perhaps correlated with some omitted variables that are also
likely to affect the banking system and the economy (see Berger et al. 2004 for an
overview of endogeneity concerns within the bank concentration literature). For
instance, local concentration may be correlated with local income or investment
opportunities, hence measuring factors related to the demand rather than the
supply of credit. In order to address possible endogeneity issues, we exploit
an instrumental variable approach, and we instrument County HHI with the
number of POSBs at the county level in 1885.
Our identification assumption is that the POSB network captures features
of the local deposit market that are not markedly correlated with lending
opportunities. We run cross-sectional regressions of county-level economic
variables, in 1885, on the number of POSBs in that county in 1885 and the
county population. After controlling for population there is no statistically
significant relation between income tax, bankruptcies, new firm creation, firm
bankruptcies, % of the labor force in agriculture, or employment to population
and POSBs in 1885.
POSBs were explicitly prohibited from lending, so that their distribution
is likely to capture elements related to the local deposit rather than the local
lending market. The interest rate offered to depositors was identical across the
country and fixed at 2.5%.
The growth of POSBs was rapid, and by 1891, the number of depositors
totaled 5.8 million (Rubinstein 1986). A survey of depositors, undertaken
18 Metropolitan areas are defined as London, Birmingham, Bristol, Liverpool, Manchester, Newcastle, Sheffield,
and Leeds.
in 1896, revealed that about 90% of the deposits were held by the working
classes. More than 25% of the deposits were held by women and about 20%
by children and students. Children were especially targeted by POSBs with the
intention of teaching them the habit of thrift and acquainting them with the use
of banking facilities (Johnson 1985). An important goal of the POSB system
was to encourage and educate people to bank, rather than purely chasing local
income, a variable that could jointly determine lending and deposits.
Deposits at POSBs were subject to a limit of £30 per person per year and no
more than £150 in total; this provision restrained the geographical diffusion of
POSBs from being driven by a sudden increase in local income. In other words,
as POSBs were capped in the amount of deposits they could take, they had
fewer incentives to change their branch network according to income shocks.
The deposit limits were only changed once, to £50 and £200, in 1893, and were
set in nominal terms.19
At the turn of the twentieth century, commercial banks became increasingly
interested in the "small" deposit market (Horne 1947), and a county with
many POSBs may have been one with attractive and unexploited deposit-taking
opportunities. The limits imposed on POSBs meant they could not collect all
the savings available in a certain region. Commercial banks may have been
able to access savings more easily in areas with greater numbers of POSBs,
as savers were already becoming used to banking services, hence reducing
transaction costs related to the collection of new deposits. If our conjecture is
correct, counties with more POSB branches in 1885 would have experienced
a larger inflow of commercial banks and more banking competition later on.
This should be reflected in a negative correlation between the number of POSB
branches in 1885 and County HHI.
As we use the number of POSBs in a county at the beginning of the period as
our instrument, the analysis cannot control for county fixed effects. We address
this issue in two ways. First, to make sure that the number of POSBs does
not capture elements related to local income we control for a proxy of county
income and literacy. An advantage of a time invariant instrument measured at
the beginning of the sample period is that it mitigates concerns related to reverse
causality. Second, in additional specifications, we interact the time invariant
instrument with year dummies in the first stage. This procedure allows us to
use county or individual fixed effects. In addition, the interaction terms give us
an idea whether the effect of the number of POSBs on local concentration vary
across time and in which years this effect is stronger.20
19 During World War One those limits were temporarily lifted. When the two stage least squares regressions are
re-run excluding war years, the results remain unaltered. In our sample period the average inflation rate was
about 2% per year with peaks of 4% and 20% around the turn of the twentieth century and during World War One
respectively. Consumer price index data are available from the Bank of England at http://www.bankofengland.
co.uk/research/Pages/onebank/threecenturies.aspx.
20 We thank an anonymous referee for this suggestion.
3. Data
We collect data on the loan registers of banks from the archives of Barclays,
HSBC, Lloyds, and RBS. These four banks are the descendants of the vast
majority of banks in our sample. The loans in our sample were usually
considered by a branch manager or loan committee or, if the bank was small,
by the board of directors.
The vast majority of loans in the register were approved. This is likely to
be explained by two processes. First, borrowers may have failed to apply for a
loan if they thought their chances of success were low. Second, verbal enquiries
about the likelihood of obtaining a loan may have been unfavorable at the lower
levels of bank management and consequently no paperwork was submitted to
the branch manager or board of directors. We have collected 31,983 loans from
43 banks, ranging from the very small (Altwood Spooner, 19 loans) to the
very large (Barclays, 5,628 loans; Lloyds, 1,720 loans; and London City and
Midland Bank, 5,325 loans).
The loan registers cover branches in 31 of the 54 counties of England and
Wales. The loans we observe were determined by the survival of archival
records. Nonetheless, we have good sample sizes in most of the larger counties.
We observe 4,862 loans from Lancashire (Liverpool and Manchester), 9,882
from Middlesex (London), 1,039 from Warwickshire (Birmingham), and 4,081
from the West Riding of Yorkshire (Bradford, Leeds, and Sheffield).
The loan registers often provide information about the occupation/industry of
the borrower. On other occasions, we could recognize the occupation/industry
from the name of the firm (e.g., Yorkshire County Publishing Company and
Wearmouth Steam Shipping Company). We use the 1911 census to classify
each borrower into 24 occupational categories. For about 10,000 loans, the
bank records do not report any occupation. These 10,000 loans make up a 25th
category, "no occupation."
In Table 4, we report summary statistics of the loan data. The average loan
size was £5,059, with a median size of £700. Only one-third of all loan contracts
had specified interest rates (the default rate, often unspecified, was that charged
by the Bank of England). If the rate was specified, it averaged 486 basis points,
which was a spread of 73 basis points over the Bank of England rate. The
average loan duration was 199 days, with a median duration of 180 days.
Roughly 75% of all loans required collateral to be posted, with the average
collateral requirement being 166% of the loan size.21 The average loan was
the fourth made to that particular borrower in our sample (and given truncation
at the beginning of the sample it is likely that an even higher rate of repeat
loans were made). A little less than 38% of loans were overdrafts, and 35% of
our borrowers were businesses. Women made up 3.5% of the borrowers, and
21 These figures are remarkably similar to those shown by Erel (2011), who finds that 73% of bank loans originating
in the United States between 1987 and 2003 were secured by collateral.
Loan amount (£ 000)
Loan spread (over Bank of England rate, basis points)
Loan duration (days)
Loan secured dummy
Loan collateral (£)/Loan amount (£)
Loan number
In-market merger dummy
Out-of-market merger dummy
Renewal dummy
Overdraft dummy
Borrower company dummy
Borrower woman dummy
NewTech dummy
Bank branches (of lending bank)
Metropolitan branch dummy
Bank ROA (Profits/Assets of lending bank)
Bank Deposit/Assets (of lending bank)
County population ( 000, in lending branch's county)
County POSB ( 000, in lending branch's county)
County HHI ( in lending branch's county)
Loan number is the nth from that bank to that customer. In-market merger equals one if, in the county in which
the loan was made, two banks that both had branches in that county merged within the previous five years.
Out-of-market merger equals one if, in the county in which the loan was made, a bank that had branches in
that county and another bank that did not have any branches in that county merged within the previous five
years and zero otherwise. Borrower company equals one if the borrower was a company or if the loan may
or may not be a business loan but the loan size places it above the 75th percentile in the full distribution and
zero otherwise. NewTech equals one if the loan was made to the electricity, chemicals, automobile, or cycle
industries and zero otherwise. Metropolitan branch equals one if the branch is located in London, Manchester,
Birmingham, Liverpool, Newcastle, Bristol, Sheffield, or Leeds and zero otherwise. County POSB is the number
of postal office savings bank branches in 1885.
loans to the NewTech sector, made up of electricity, chemicals, and automobiles
(which follows Braggion and Moore 2013), were 2.4% of the total.
The average bank making a loan operated 491 branches, of which 42% were
metropolitan. Banks obtained a ROA of slightly over 1%, and funded 85% of
their assets with deposits, the remaining assets were funded from equity. The
county in which the average loan was made contained a touch over three million
people and 456 POSBs. County HHI averaged 0.156 with a standard deviation
of 0.078.
Data on bank profitability, assets, liabilities, and the branch network
were retrieved from London Banks and Kindred Companies, The Banker's
Magazine, and The Banking Almanac. We obtain balance sheet information
from The Economist's Banking Supplement, published semi-annually in May
and October. We construct the entire branch network for all banks in England
and Wales annually between 1885 and 1925.
We collect county-level data on population and employment every decade, as
well as literacy in 1885. The employment and population data come from Lee
(1979). For our measure of literacy, we use the percentage of the population
denoted as literate by the books of the Church of England day and evening
schools for the year 1867 (Stephens 1987).
4.1 Loans
To measure the impact of bank concentration on the financial sector we
first examine how banks' loan making decisions were affected by changing
concentration in a particular county. In Table 5A, we run ordinary leastsquares (OLS) regressions of individual loan sizes on County HHI (lagged
one year).22 We find that increasing County HHI is associated with lower
loan sizes (Columns (1) to (3)): A one-standard-deviation increase in County
HHI is associated with a 25% to 29% smaller loan size, on average.23 Since
many borrowers are repeat customers of the same bank, in Column (4) we
report results with borrower fixed effects. Even for the same borrower, if bank
concentration increases in a particular county that borrower will receive smaller
loans. In Columns (5) to (7) we report the OLS results for the subsample of
business-only loans. We define a business loan as one that a bank grants to
either a partnership or a limited liability company, or which may or may not be
a business loan but is above the 75th percentile by loan size. The results are little
changed if we drop all loans above the 75th percentile or if we drop the loans
which cannot be definitively classified as either personal or business from the
analysis. We find statistically significant correlations of smaller business loan
sizes with increased banking concentration, although the economic significance
is lower than that for the full sample. A one-standard-deviation increase in
County HHI is associated with roughly a 16% decrease in business loan sizes.
In Table 5B, we regress the other loan characteristics on lagged County
HHI and controls, always using borrower fixed effects. A loan decision is
a joint determination by the bank and the customer on the amount, interest
rate, collateral, and duration of the loan. Since these four loan characteristics
are determined as part of a package, we run separate regressions of each
characteristic on County HHI and the controls. The loan spread, although
negatively related to County HHI for business loans is of zero economic size.
Banks rarely varied the interest rate from the Bank of England rate and when
it differed it was typically 0.5% above that rate.24 Increasing concentration is
associated with increased collateral requirements for borrowers. We find that a
22 We present results in which we double cluster the standard errors at the county-year level. We also run
specifications where we cluster standard errors either by county or bank or we double cluster by bank and
county; results are unchanged in either case. Since we do not have a very large number of clusters (between 33
and 37, depending on the clustering dimension and the specification), we also perform regressions where we
take group averages of the observations either by bank/year or by county/year. Results are still unchanged.
23 In unreported specifications, we also run regressions where we use the Herfindahl index computed at the city/town
level; the results remain unaltered. We prefer to present regressions with County HHI, as for some borrowers we
only know the county where the loan originated, not the city.
24 Using original data from the profit and loss accounts of all branches of the Midland Bank between 1881 and
1925, we compute the average spread between the interest rates applied on loans and deposits, which is about
4 percentage points, a figure comparable to contemporary spreads. Cottrell (1980) describes that interest rates
on loans around 1909 were commonly linked to the Bank of England rate in urban areas, whereas in rural areas
loans were charged a fixed interest rate of 5%.
County HHI (one-year LAG)
Log (Loan number)
Log (County population)
Log (Bank branches)
Bank controls
County FE
Borrower FE
Occupation/Industry FE
Bank FE
Year FE
Econ sig. (County HHI)
−4.400∗∗∗
0.299∗∗∗
0.126∗∗
−3.677∗∗
0.165∗
We regress the log of (1 + Loan amount) on one-year lagged County HHI and the control variables. Standard errors are double clustered at the county-year level. ***, **, and *,
represent coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively. Constant is not reported. The bank controls are ROA and Deposits/Assets.
Table 5A
Loan regressions: Baseline results
Table 5B
Other loan terms
Log (1+
Loan spread)
Collateral/
Log (1 +
Loan durat.)
−0.064∗
We regress various loan terms on one-year lagged County HHI and the bank controls (ROA and Deposits/Assets). Standard errors are double clustered at the county-year level. ***,
**, and *, represent coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively. Constant is not reported. All regressions use year fixed effects.
Econ sig. (In-market merger)
Econ sig. (Out-of-market merger)
Loan Amount)
We regress various loan terms on one-year lagged County HHI, measures of bank mergers, and controls. Standard errors are double clustered at the county-year level. ***, **, and *,
represent coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively. Constant is not reported. All regressions include controls for Borrower company
dummy and Borrower woman dummy (data not shown) and also use bank controls and year fixed effects.
Table 5C
Mergers and loan terms
Distance to neighbor (km)
London FE
Econ sig. (Distance to neighbor)
We regress various loan terms on the distance (in kilometers) to the bank branch's nearest competing neighbor for all loans made in London and Birmingham. Standard errors are
double clustered at the city-year level. ***, **, and *, represent coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively. Constant is not
reported. All regressions use bank controls and year fixed effects.
Table 5D
Distance to nearest competing branch and loan terms
County HHI (One-year LAG) * NewTech
Econ sig. (County HHI/NewTech)
For all observations in which we can determine the industry of the borrower (either an individual or a firm), we regress various loan terms on one-year lagged County HHI and NewTech
and the control variables. Standard errors are double clustered at the county-year level. ***, **, and *, represent coefficients that are statistically different from zero at the 1%, 5%, and
10% level, respectively. Constant is not reported. All regressions control for Borrower company dummy and Borrower woman dummy (data not shown) and all use year fixed effects.
Table 5E
Loan terms and new versus old tech borrowers
one-standard-deviation increase in County HHI correlates with a 24% increase
in the collateralization of all loans, and a 17% increase for business loans.
Increasing banking concentration is associated with longer loan durations. The
economic size, for the same business borrower, is a 12% increase in duration for
a one-standard-deviation increase in County HHI. Since the average duration
of a business loan is about 180 days, this corresponds to an increase of just 20
In aggregate, the results indicate that increasing local market concentration in
banking is associated with smaller loan sizes and tighter collateral requirements,
although loan durations for business borrowers are slightly relaxed. Together
these results lend support to the traditional argument that higher levels of bank
concentration are bad for borrowers.25
In Table 5C, we analyze whether bank mergers also have a direct impact
on the size of loans granted and their conditions. Like Sapienza (2002) and
Focarelli and Panetta (2003), we distinguish between "in-market" mergers and
"out-of-market" mergers. In-market mergers are mergers between banks with
part or all of their branches operating in the same county. Out-of-market mergers
are mergers between banks that do not have a geographical overlap of their
branching networks.
The variable In-market Merger takes the value of one if, in a certain county
during the previous five years, at least one bank that used to operate in that
county was taken over by another bank that continued to operate in the county.
Out-of-market Merger takes the value of one if, in a certain county during the
previous five years, at least one bank was taken over by another bank that had
not previously operated in that county.26
Table 5C, shows that in-market mergers in the county are associated with
smaller loan amounts. The result is statistically and economically significant.
At least one in-market merger in the county during the previous five years leads
to a 13% reduction in the loan size for the same borrower (Column (3)). Inmarket mergers are also associated with a 9% higher collateral ratio and a 5%
shorter duration for the same borrower.
We do not find particularly strong results for out-of-market mergers. Loan
terms are less likely to stipulate collateral, but also to be of shorter duration.
Although the results in Table 5A–5C, present a consistent set of results, there
may be concerns that the unit of analysis, the county, is affecting the analysis.
Counties may differ along many dimensions such as attitudes to finance, wealth
inequality, or the rural/urban divide that we have not adequately controlled
for. Alternatively, the relevant banking market may be larger, smaller, or just
different from the county. To partially address this concern, we analyze loans
made in the two largest U.K. cities, London and Birmingham, for which we have
25 We also try a matching approach to loans in high versus low concentration counties. Loans in high concentration
counties are substantially smaller (see the Online Appendix).
26 We also try shorter time periods, such as 2, 3, and 4 years; the results are unchanged.
the precise street address of the branch that originated the loan. We geocode
all London and Birmingham branches, and calculate the distance in kilometers
from each branch, as the crow flies, to the nearest branch of a competing bank.
Table 5D, shows that the more distant the nearest competing branch is, the
smaller the loan amount extended by the bank (Column (1)). Once we add
borrower fixed effects the coefficient becomes marginally statistical significant.
In addition, the further the nearest competitor, the larger is the spread charged
by the bank, the more likely it is that collateral will be demanded, and the
shorter the duration, although all effects are of modest economic size. These
city-level results are similar to the county-level results in Table 5A–5C.
4.2 Loans and technological change
We also investigate the idea, first introduced by Petersen and Rajan (1995), that
increasing credit market concentration may be beneficial for certain types of
firms. Their empirical results show that young, credit-constrained firms benefit
from a more concentrated local banking market. Due to data constraints we do
not observe the age of the firm receiving a loan; however, we do observe in
which industry they operate.27 The late nineteenth and early twentieth centuries
witnessed the expansion of Second Industrial Revolution technologies such
as bicycles (which led to automobiles), chemicals, and electricity generation.
In Table 5E, we find that NewTech firms' loan conditions are similar to long
established firms. Although the loan size for NewTech firms seems to be reduced
less than that of established firms when County HHI increases (Column (1)),
once we add borrower fixed effects the differential disappears (Column (2)).
The other loan term sensitivities to County HHI are little different between
NewTech and established firms. NewTech firms' loan spreads increase faster
than established firms when County HHI increases, although the effect is very
small.
Since there are obvious endogeneity concerns in the relationship between the
extension of credit and the structure of the banking industry, we now turn
to our instrumental variable approach. In Table 6, we present the results of
our first-stage instrumental variable regression. In Column (1), we see that
County HHI has a strong negative association with the number of POSBs in
the county. We observe a similar result when we control for bank characteristics
(Column (2)).
Before we present our second stage results, we run a diagnostic test with the
intention to see whether the effect of the number of POSBs in 1885 on local
concentration varies across time. In particular, we estimate at the county level
27 In these regressions we exclude borrowers for which we do not have information about industry and occupation,
as we cannot classify them as old or new technology.
Determinants of bank concentration: First-stage 2SLS results
County POSB ( 000)
We regress one-year lagged County HHI on County POSB, interactions of County POSB with year dummies, and
controls for Borrower company dummy, Borrower woman dummy, the employment-to-population ratio (1881),
tax revenue from agriculture (1885), and literacy coefficients (controls not reported). The bank controls are
ROA and Deposits/Assets.Standard errors are double clustered at the county-year level. ***, **, and * represent
coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively.
the following equation:
County HHIj,t = α +
δt I t +γbasePOSB j,1885
t=1885
γt I t POSBj,1885 +Controlsj,t +εj,t ,
where It is a dummy variable that takes the value of 1 for year t and 0 otherwise,
and POSBj,1885 is the number of Post Office Saving Banks in county j in
1885.28 Our objects of interest are the γbase and γt coefficients, which indicate
the relationship between POSBs and local banking concentration in each year.29
In Figure 1, we plot γbase for 1885, our baseline year, and (γbase +γt ) for all
other years. Figure 1, panel A, displays the coefficients with the corresponding
28 We run this test using county j in year t as the unit of observation rather than using the loan data. We do this to
avoid the number and availability of loans per county affecting the results.
29 We present results with county population, county literacy and the employment to population ratio as
controls. Adding more county-level controls does not change the main results, nor does controlling for initial
county characteristics (rather than contemporaneous characteristics), nor does controlling for initial county
characteristics interacted with year dummies. We also have a specification where we control for county fixed
effects. The results are again unaltered, but they are more difficult to interpret as POSBs (in 1885) is fully collinear
with the set of county dummies and we cannot estimate a coefficient γbase . In this case, the coefficients on the
interaction terms have to be interpreted as incremental changes in the relationship to an undefined base.
Estimated effects of POSBs on county HHI
We estimate the impact of the initial (1885) number of Post Office Savings Banks (POSBs) on county HHI, year
by year, together with 95% confidence intervals. We use year fixed effects and control for county population,
county literacy, and the county employment to population ratio (A). We present the coefficients from panel A
divided by the 1885 coefficient. A ratio greater than one indicates a more negative impact of POSBs on County
HHI in year y than in 1885 (B).
95% confidence interval, whereas panel B shows the coefficients normalized by
their 1885 value to illustrate their economic magnitude. Figure 1 reveals that in
most of the years the coefficients are negative, which suggests that most of the
time a larger number of POSBs is associated with lower banking concentration.
The coefficients are larger (in absolute value) and statistically significant around
the turn of the twentieth century: Interestingly, this is the moment when Horne
(1947) says that commercial banks actively pursued deposits markets. The
coefficients are no longer statistically significant from 1920 onward: in this
period, there are very few or no bank mergers and the British banking market
already had been established around the five large London banks.
Table 7, Column (1), shows the second stage result when the dependent
variable is the loan amount and we use the number of POSBs in 1885 as the
sole instrument. Table 7, Columns (2)-(6), present a two-stage least-squares
regression with borrower fixed effects, where in the first stage we interact
the number of POSBs in 1885 with year fixed effects. Table 7, Column (2),
indicates that, when we control for borrower fixed effects, a one-standarddeviation increase of County HHI leads to a 15% decline in the loan amount.
Concentration does not have a statistically significant effect on Loan Spread,
and the economic size is anyway miniscule. A one-standard-deviation increase
in concentration causes a 40% increase in the collateralization rate for loans,
and makes collateral more likely to be required (Columns (4) and (5)). Increases
in County HHI increase the duration of loans made, although the effect is not
statistically significant. Table 7 also shows that in four out of six cases, the F
statistics of the first stage are well above ten.30
4.4 Addressing possible issues with the IV analysis
A possible concern regarding our instrumental variable strategy is that the
number of POSBs might act as a proxy for an omitted variable, which is also
correlated with loan conditions or banks' lending policies. For instance, in
urban counties, banks' lending policies may systematically differ from those
of banks in rural counties, as the pattern of diversification opportunities may
differ. In particular, banks that operated in rural areas may be overly specialized
in lending to agriculture and hence less diversified vis-à-vis peer banks that
operated in urban areas.
We address this issue and check whether the relationship between lending
patterns and local market competition differs when we compare national (i.e.,
well-diversified banks) with local (i.e. less diversified) banks. The results of
this test indicate that there are neither economically nor statistically significant
30 The F-statistics are below 10 when the dependent variables are collateral to loan amount and duration. We believe
that in these cases the first stages are less powerful because we both lose observations (with borrower fixed effect
regressions we drop singleton observations) and because borrowers fixed effects are a tougher way to control for
unobservables. In the specifications where we control for county fixed effects, the F-statistics are always well
above 10.
F-statistic first stage
We regress various loan terms on fitted values of one-year lagged County HHI (without POSB-year interactions) and bank and county controls. In Columns (2)-(6), we use the fitted values
of one-year lagged County HHI from Table 6, and we also include county POSB-year interactions. Standard errors are double clustered at the county-year level. ***, **, and * represent
coefficients that are statistically different from zero at the 1%, 5%, and 10% level, respectively. The constant, employment-to-population ratio (1881), and literacy coefficients are not reported.
The bank controls are ROA and Deposits/Assets. The regressions use bank and year fixed effects but do not use county fixed effects.
Loan regressions: 2SLS results
differences between the two types of banks and their lending policies.31 We
also address the omitted variables concern by including an extra control
variable in our regressions—population density—as rural areas are usually
characterized by low population densities in comparison to urban areas. We
measure population density as the ratio of total population living in a county
divided by the size of the county measured in acres (see Lee 1979). The results
are unaltered by the inclusion of this extra control variable.
Another possible issue with our instrument relates to the political economy
of banking. The existing literature has indicated that political influences shape
credit markets. Rajan and Ramcharan (2011), for instance, highlight the power
the elite had in the early twentieth-century United States to shape local credit
markets in order to serve their interests. In particular, landed elites restricted the
access of banking institutions in the areas under their control, so as to maintain
monopoly power in the deposit and lending market. Our instrumental variable,
the number of POSBs, could be correlated with the strength of the political
elite. For instance, the number of POSBs could be the outcome of political
lobbying, where landed elites prevented POSBs from entering the county in
which they controlled the collection of savings. Though we have not found any
historical or anecdotal evidence indicating the role of the political landed elite
in determining the functioning of local deposit markets in Britain, we tackle
this possibility in an econometric test. We include in our instrumental variable
regressions a proxy for the presence of a landed elite, with a Gini index based
on the distribution of the land within the county.32 Higher values of the Gini
index indicate that land ownership is particularly concentrated and capture the
strength of the landed elite. The inclusion of the Gini index in the two-stage
least squares regressions leave our results unchanged.
4.5 Borrower quality
Our results, that borrowers in more concentrated markets receive worse loan
terms, could emanate from two (competing) theories. Boyd and De Nicoló
(2005) argue that loan applicants with riskier projects are those that accept
loans in more concentrated markets. Therefore, banks rationally charge higher
interest rates and demand more collateral as protection. Alternatively, banks
may use their market power to restrict the supply of loans, which cuts off
the funding to marginally profitable borrowers and serve only the best quality
borrowers. If Boyd and De Nicoló are correct, then we might expect to find
evidence that banks in more concentrated markets are more concerned about
the credit quality of their customers (i.e., the perceived quality of the average
borrower deteriorates). However, if the market power story is correct, we might
expect to find that banks have more confidence in the clients to whom they make
31 Results are available upon request.
32 We follow Rajan and Ramcharan (2011), who rely on a similar measure.
To discriminate between these two alternatives we examine banks' internal
comments about their borrowers. Written comments are recorded for a little
over 9,000 of the loans in our sample. These are internal comments made
by bank officers, hence a candid reflection on the banks' clients. These
comments are usually matter-of-fact sentence fragments, (e.g., "to be paid in
instalments[sic]", "to assist them in continuing their furnaces in full work"),
which suggest neither a positive nor a negative outlook on that particular client.
However, some of these comments carry a connotation as to the credit quality of
the borrower. Since the vast majority of loans that appear in the banks'books are
approved loans, the majority of these comments are generally positive in nature
(e.g., "very respectable, I believe both of them to be excellent men of business.
Many yrs [sic] in business, never failed. 24 yrs [sic] connected to the bank,
capital unknown."). To quantify how positive (or negative) a certain comment
is we feed the comments into the Linguistic Analysis and Word Count (LIWC)
software. For each comment, we obtain a positivity score and a negativity score,
out of 100. For example, the "very respectable" comment above receives a
score of 7.41 for positivity and 3.7 for negativity. We then regress the positivity
scores and negativity scores (in separate regressions) on lagged County HHI,
as well as bank and customer characteristics (see Table 8, Columns (1) to
(4)). Counties with higher bank concentration tended to give their borrowers
comments that are more positive once we add borrower fixed effects (Column
(2)). High concentration counties also had loans with fewer negative comments,
although the magnitude is reduced and the statistical significance eliminated
once we add borrower fixed effects (Columns (3) and (4)).
One drawback of the LIWC software is that it does not handle the slightly
archaic language well, neither does it accurately deal with negated phrases nor
irony. For example, the most colorful comment in our sample, "A good judge of
hares and cattle but a bad businessman, he lies like the devil and rather than go
100 yards straight he'll go a mile crooked, 2 years in business," is given a score
of 3.45 for positivity (presumably for expert hare and cattle judging) and 3.45
for negativity. A human reader of this comment would presumably note the need
to watch that particular borrower very carefully. To address this issue with the
LIWC software, we personally read all comments and score them as positive
(zero or one) and negative (zero or one), with a neutral comment having a zero
for both positivity and negativity. We run linear probability model regressions
with this subjective measure of client quality (Columns (5) to (8)). Counties
with higher bank concentration are associated with more subjectively positive
comments (Columns (5) and (6)) and fewer subjectively negative comments
(Columns (7) and (8)). The subjective results are of statistical significance
and sizable magnitude. A one-standard-deviation increase in County HHI
means that, if a comment were made, it is 13% more likely to be positive,
and 19% to 29% less likely to be negative. We conclude therefore that
increasing bank concentration appears to have gone hand in hand with a
better quality of borrower, at least as judged by the bank making the loan. In
LIWC
We use two measures of loan applicant quality, LIWC (which returns scores from 0 to 100 for the positivity and negativity of the bank's internal comments with regards to the loan application),
and a subjective measure (with positive scored as zero or one and negative scored as zero or one). We regress these measures of loan quality on one-year lagged County HHI and borrower and
bank characteristics. Standard errors are double clustered at the county-year level. ***, **, and *, represent coefficients that are statistically different from zero at the 1%, 5%, and 10% level,
respectively. Constant is not reported. All regressions use bank controls, bank fixed effects, and year fixed effects. The bank controls are number of bank branches, ROA, and Deposits/Assets.
Loan terms and subjective loan applicant quality
Bank-level summary statistics
Bank HHI
Number of counties
Bank ROA
Assets (£ 000)
Cash to assets
Investment to assets
Loans to assets
Authorized capital to assets
County population ( 000)
# of acquisitions, past five
Growth of assets, past five
Bank HHI is a weighted average of County HHIs, where the weights are given by the fraction of that bank's
branches in a particular county. Number of counties is the number of counties in which a bank has branches.
Investment to assets equals the book value of marketable securities divided by Assets. Authorized capital to
assets is the book value of capital that the bank is authorized to issue divided by Assets. County population is the
population of the county in which the bank had the most branches in that year in thousands. # of acquisitions,
past five, is the number of banks taken over during the previous five years. Growth of assets, past five, equals the
percentage increase in the book value of assets over the previous five years.
counties where banks make smaller loans and require more collateral, banks are
(internally) noting more positive characteristics about those to whom they grant
credit.
4.6 Balance sheet analysis
As the results presented in Table 5A through 8 come from a sample consisting
of bank loans that we have been able to locate in bank archives, there is the
possibility that some bias may have entered our results due to, for example,
a policy of selective record retention by banks. To alleviate concerns that our
results are driven by an examination of (possibly) nonrandom loan records, we
examine bank behavior in the aggregate.
Table 9 reports summary statistics of the bank-year data we have collected
on balance sheets. The mean bank operated in 7.4 counties. Banks earned 1.4%
on their assets, on average, with a standard deviation of 0.7%. On average
banks held 14.8% of their assets as cash, or cash equivalents, 18.5% was held
as marketable securities, and 62.4% was extended as loans. The average level
of assets, across all bank-years, is £16.5 million. There is a lot of skewness in
assets, both across time and across banks, and the median level of assets is £3.4
million. Banks had an authorized capital of 34.3% of their assets, on average.
Banks may face different degrees of competition to each other depending
on where their branch network is located. We capture this notion with the
variable Bank HHI, a bank-specific weighted average of County HHIs, where
the weights are given by the fraction of the bank's branches in a particular
county. We compute Bank HHI for every bank and every year in our sample.
The mean figure of this across bank-years is 0.135. The mean bank had taken
over 0.44 banks within the previous five years, and experienced asset growth
of 24% over the same period.
Bank balance sheets and bank concentration
A. Fixed effects
Bank HHI (One-year LAG)
ROA (One-year LAG)
Log assets (One-year LAG)
Log number of counties (One-year LAG)
Log # of acquisitions, past five
Log main county pop. (One-year LAG)
Econ sig. (Bank HHI)
Cash/
Investments/
Loans/
capital/Assets
−0.05
B. 2SLS results
Log county population (One-year LAG)
Panel A reports OLS regressions of balance sheet ratios regressed on one-year lagged Bank HHI plus controls
in Table 9. Bank and year fixed effects are used. Panel B reports 2SLS second-stage regression results. Standard
errors are clustered at the bank level. ***, **, and *, represent coefficients that are statistically different from
zero at the 1%, 5%, and 10% level, respectively. Constant is not reported.
In Table 10, we regress bank balance sheet variables on County HHI and
controls. In panel A, we show the OLS results (which include year, bank, and
main county of operation fixed effects), and in panel B we present instrumental
variable estimates, with the number of POSBs in 1885 as the instrument.33
The results indicate that banks in more concentrated markets tended to reduce
their cash holdings, although the estimates are not statistically significant.
Concentration acted to increase the share of safe, marketable investments
33 In these regressions we do not control for local literacy or income as we already control for main county of
operation fixed effects. In each year we the define the 'main county of operation' as the county in which the bank
has the most branches.
(usually Treasury bonds and blue-chip railway preference shares) in a bank's
balance sheet, and the effect is statistically significant in both the OLS and
instrumental variable regressions. In more concentrated markets loans decrease
as a share of assets in both regressions and are significant at the 5% level.
The economic effects of increasing concentration are sizeable; the fixed effect
results indicate that a one-standard-deviation increase in Bank HHI is associated
with a 5% decrease in Cash to Assets, a 27% increase in Investments to Assets,
and a 7% decrease in Loans to Assets. Once we instrument for Bank HHI, the
economic impacts are stronger. A one-standard-deviation increase in Bank HHI
leads to an 8% decrease in Cash to Assets, a 45% increase in Investments to
Assets and a 13% decrease in Loans to Assets. We do not find a consistent
relationship between Bank HHI and authorized capital.
In conclusion, increased bank concentration was associated with fewer loans
and increased holdings of low-risk securities, which was likely to have had a
net effect of lowering bank risk-taking.
We have presented a suite of results that strongly support the idea that a
more concentrated banking sector may lead banks to pursue safer investment
strategies, while offering tougher lending terms to borrowers. Counties that
experience higher bank concentration tend to be those with lower loan sizes,
alongside higher interest rates and more demands for collateral. Banks respond
to increasing concentration by holding more marketable securities, which are
typically low-risk government bonds, and holding fewer of their assets as
loans. The turn of the twentieth century merger wave, which drove banking
concentration substantially higher in England and Wales, made banks safer,
but at the same time, it led to poor outcomes for the clients of banks.
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2fhhx044, rfs


The benefits of integrating IT and security teams By integrating IT and security teams your company can improve security and reduce operating costs, says Arcules CEO Lars Nordenlund.
According to Meh Chang, a researcher at Taiwanese security firm DEVCORE who discovered the vulnerability, "exim allocates a buffer of 3*(len/4)+1 bytes to store decoded base64 data. However, when the input is not a valid base64 string and the length is 4n+3, exim allocates 3n+1 but consumes 3n+2 bytes while decoding. This causes one byte heap overflow (aka off-by-one)." This can be leveraged by attackers to run arbitrary code or as part of a denial of service attack.


Of Montreal have shared a new video for their song 'Last Rites at the Jane Hotel'. The clip was created using stop motion animation and accompanies a track first unveiled on the band's most recent album, 'Aureate Gloom'. Click below to watch.
'Aureate Gloom' was released in March. This year has also seen the band put out a new live album, 'Snare Lustrous Doomings'. The 90-minute double LP was produced for Record Store Day (April 18) and features 19 career-spanning tracks taken from performances at San Francisco's Great American Music Hall and Portland's Wonder Ballroom.
'Snare Lustrous Doomings' was pressed on 180-gram vinyl in yellow and orange, and limited to 3,000 copies, though it's currently available to hear via streaming services. Click below to hear the live version of 'Wrath Pinned to the Mist and Other Games'.


text:
Q: Precision Voltage Reference I have a couple of questions regarding using a precision voltage reference on a DAC - AD7545A.
I am trying to fix an existing circuit that uses AD584  to provide a 5V DAC (AD745A) to provide an Analog Output between 0 to 5V using a circuit design similar to this figure 4 on the AD7545A datasheet.
And then it is stepped up (amplified to 0 - 12V) with a high current opamp OPA548 to drive a load.
Now, my question is can I use AD7545A to provide the 0 - 12 V output without going through an extra space? I will have to replace the AD711 in the figure with OPA548 to drive the load, and also I will need a precision voltage reference that can provide a 12 V reference to the DAC. AD584 has only 4 programmable outputs - 10,7.5,5 and 2.5. What would be a good replacement.
Well, and the second question is, that in case I have to use the existing circuit, the application notes I found on the AD584 datasheet shows it giving a -10V reference to DAC using the configuration of figure 16.
I would like to give it a +ve 5 V reference instead. Is it as easy as as just connecting the +5V pin to the Vdd of the DAC, providing the 15V Vin to 584 and grounding the common?
Sorry, I tried posting the figures here, but as a new user I cannot post pictures yet.

A: As for supplying AD7545A with higher voltage, that should be alright. Don't forget level shifters for your digital inputs, though.
As for the reference voltage - you need an independent 12V voltage source to set the required output voltage range of the DAC. Not sure how to do this with AD584 - I don't see any obvious way. You could perhaps use two of them but they have to refer to ground (not Vdd).

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text:
ReportPregnant Meghan Markle Loses Yet Another Palace Aide As Private Secretary Quits
Another one bites the dust. Duchess of Sussex Meghan Markle has lost the fourth member of her royal staff in a matter of months — assistant private secretary Amy Pickerill, who was pegged to take over the role when their private secretary Samantha Cohen leaves her post later this year.
Multiple outlets have reported that the Pickerill will leave after the pregnant duchess and her husband, Prince Harry, make the move to their new residence at Frogmore Cottage in Windsor this month.
An insider told Entertainment Tonight that Pickerill is "a popular member of staff" and she is leaving on "amicable" terms. And a friend of the palace aide's revealed to the Daily Mail that Pickerill "has agreed to stay on to help them with the birth of the baby and organize their new household but then will move on." We bet the royals definitely appreciate that, as Meg's due date is said to be sometime in April or early May. It's coming up!
Pickerill was reportedly tapped to take over for Cohen, who is set to leave Kensington Palace later this year. Despite reports that Meg has been "difficult" to work with and thus is having a hard time holding onto her staff, Cohen's exit proved the opposite. The secretary's departure was actually expected, as she only sign on to work with the Sussexes for six months.
James Devaney/GC Images
The announcement of Cohen's departure came on the heels of the resignation of the duchess' personal assistant, Melissa Toubati, who quit her post after only six months on the royal job.
Meg and Harry also recently saw their personal bodyguard leave her post in January, though that was another amicable exit. "The decision to leave was personal and no reflection on her time working with Meghan, who she liked working with," an insider told Us Weekly at the time of her departure. "She will be missed."
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