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

Author

Listed:
  • Marc Flandreau

    (Graduate Institute of International Studies and Development, Geneva)

  • Juan Flores

    (Department of Economic History, University of Geneva)

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, 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).
    • Handle: RePEc:hes:wpaper:0002
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    References listed on IDEAS

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    Cited by:

    1. Flandreau, Marc, 2017. "Reputation, Regulation and the Collapse of International Capital Markets, 1920-1935," CEPR Discussion Papers 11747, C.E.P.R. Discussion Papers.
    2. Marc Flandreau & Juan Flores & Norbert Gaillard & Sebastian Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers 15-2011, Economics Section, The Graduate Institute of International Studies.

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    More about this item

    Keywords

    Bondholders; Investment banks; certification;
    All these keywords.

    JEL classification:

    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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