The political economy of the banking sector

Banking history has traditionally represented the evolution of the banking sector in various nations as essentially a market-driven path: financial systems worked quite efficiently and capital markets were perfectly rational in supplying firms with funds. If there were credit restrictions, criticism should be levelled at macro policy and not at banks. Francesca Carnevali challenged this view by arguing that in the four largest European economies the structure of the banking sector is shaped by the interaction of social, economic and political groups, rather than by invisible market forces.

In the twentieth century, Britain became the economy with the most concentrated banking sector and industrial base in Western Europe. Conversely, the French, German and Italian banking systems remained segmented, with Italy showing the highest degree of segmentation. The interplay that took place between the state and social and economic groups representing small firms in France, Germany and Italy did not happen in Britain. In the three Continental nations small firms occupied an important place in the cultural identity, where they were seen as preservers of social stability and as valuable sources of votes. Small firms in Britain had little lobbying power or political representation, and neither the Conservative nor the Labour party developed policies in their favour.

As local banks disappeared in Britain, nothing replaced them to make use of the information possessed by local networks, in order to fund viable investment projects of small and medium-sized enterprises (SMEs) clustered in regional economies. In France, Germany and Italy, however, local and regional banks retained the larger share of commercial lending, and the state intervened with the promotion of additional public and semi-public lending institutions. Here, a segmented banking system allowed different types of banks to specialise in different types of customers in different geographical areas, ensuring the fulfilment of the credit needs of SMEs.

Studies on the financing of SMEs in the USA, an economy closer to the ‘Anglo-Saxon’ model than the Continental European one, strengthen Carnevali's argument, with analysis of SMEs in the late nineteenth and early twentieth centuries, and also in the late twentieth century, showing the importance of local commercial banks.