Bondholders versus bond-sellers? Investment banks and conditionality lending in the London market for foreign government debt, 1815–1913

This paper offers a theory of conditionality lending in nineteenth-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...

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Bibliographic Details
Published in:European review of economic history 2012-11, Vol.16 (4), p.356-383
Main Authors: FLANDREAU, MARC, FLORES, JUAN H.
Format: Article
Language:English
Subjects:
19th century
Bank loans
Bankers
Banking crises
Banks
Borrowing
Capital markets
Collective action
Debt
Deficit financing
Economic history
Funding
Investors
Liquidity
Loan defaults
Loans
Market shares
Prestige
Relationship banking
Reputations
Sovereign debt
Stockholders
Underwriting
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Summary:This paper offers a theory of conditionality lending in nineteenth-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.
ISSN:1361-4916
1474-0044
DOI:10.1093/ereh/hes005