Stefano Battilossi, Financial innovation and the golden ages of international banking: 1890–1931 and 1958–81Throughout the twentieth century, the internationalisation of banking was both a factor for, and an ensuing aspect of, rising globalisation. During the period 1890–1931, commercial banks of industrialised countries promoted organisational and process innovations that successfully challenged the dominance of merchant banks in international financial intermediation. International banking re-emerged from interwar nationalistic retrenchment during the late 1950s, when banks exploited regulatory asymmetries to foster the emergence of Eurocurrency markets. Eurobanks provided not only global liquidity redistribution but also portfolio transformation services to corporate and sovereign customers. Financial innovations related to Eurobanking mark a secular discontinuity as they proved to be vehicles of a banking revolution, based on competition, deregulation and wholesale-market funding.

Despite a stream of information from recent research, as well as analytical interpretations, we still lack a general picture of pre-1914 multinational banking based on a unifying empirical approach comparable to that recently developed by financial economists for the wave of banks' multinational expansion in the late twentieth century. The main purpose of this article, based on a unique dataset covering the foreign branches of British, French and German banks from 1880 to 1913, is to test in a similar theoretically-driven fashion the determinants of multinational banking during the first globalisation. The empirical strategy is based on an augmented gravity model in which geography and institutions interact with economic factors in determining the patterns of multinational banking. Contrary to what has emerged from recent studies on present multinational banking, I find that the 'fundamentals' of pre-1914 foreign branching cannot easily be fitted into a gravity-like model, and that no unifying pattern of foreign expansion can be inferred from the data.

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In interwar Italy, at least six major episodes of banking crises required the intervention of monetary authorities to bail out, restructure, or liquidate distressed intermediaries. The five large universal banks rescued in the systemic crisis of 1930-1 jointly accounted for one-third of the total assets of the banking system. What made Italian leading banks so prone to crises? This article suggests that their fragility was ultimately caused by governance failures, both public and private, that enhanced excess risk-taking. Empirical evidence is consistent with theoretical insights according to which the potential for moral hazard and conflict of interest, endemic in universal banking, can be magnified when banks enter into long-run relationships with firms and base their growth strategy on the pursuance of monopolistic rents. Interwar Italy emerges as a case in which an insider system devoid of the disciplinary devices provided by sound governance institutions created perverse incentives and weakened the resilience of the banking system to adverse macroeconomic shocks.

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