Organizational Determinants of Bank Resilience: Explaining the Performance of SME Banks in the Dutch Financial Crisis of the 1920s
Published online by Cambridge University Press: 07 March 2019
By the start of the twentieth century, the two organizational forms most used by Dutch banks to raise capital through the dispersal of their ownership were the cooperative association and the public company. Share ownership in cooperatives was typically restricted to customers, while companies permitted outside investors. Neither organizational form dictated specific shareholder liability arrangements. New specialist banks targeting small and medium-sized enterprises (SMEs) combined these two organizational forms and flexible liability rules to create hybrid forms. I find those that took the public company form were more likely to suffer distress during the Dutch financial crisis of the 1920s. Liability arrangements for shareholders, by contrast, had a negligible impact on these banks’ resilience.
- Research Article
- Copyright © The President and Fellows of Harvard College 2019
I thank Michael Aldous, Graham Brownlow, Abe de Jong, Philip Fliers, Oscar Gelderblom, Joost Jonker, Peter Koudijs, Naomi Lamoreaux, Lyndon Moore, and John Turner for their comments and encouragement. I thank audiences at the University of California, Davis (2014), the European Historical Economics Society (Pisa, 2015), Queen's University Belfast (2016), and Universiteit Utrecht (2017) for feedback. Finally, I thank two anonymous reviewers for showing me how to improve my work.
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14 One 1918 guilder equaled 0.71 grams of gold, 0.46 USD, or 0.10 GBP (http://www.historicalstatistics.org/Currencyconverter.html); and 6.56 2018 euros (http://www.iisg.nl/hpw/calculate.php).
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16 ING was the world's eighteenth-largest financial services provider in 2012; see “Global 500 Companies,” Fortune, 23 July 2012. The group has since de-merged into separate banking and insurance firms, but the former remains the Netherlands’ largest bank; see “Data Dispatch: The World's 100 Largest Banks,” S&P Global Market Intelligence, 6 Apr. 2018.
17 The argument goes that this was a consequence of the disappearance of local banks following consolidation in the banking sector at the start of the twentieth century; see Stoffer, J., Het Ontstaan van de NMB: De Geschiedenis van haar Voorgangers in de Jaren 1900 tot 1927 (Amsterdam, 1985)Google Scholar.
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19 These statistics were collected by the Nederlandsche Bank from annual reports. Middenstandsbanken enter Table 1 in 1913, but are represented by just twelve banks—an underestimate of the full size of this category.
20 From an evolutionary economics perspective, my article could be considered as a case study of what Armen A. Alchian called the “positive profit criterion” necessary for natural selection to work. See Demsetz, Harold, “Rationality, Evolution, and Acquisitiveness,” Economic Enquiry 34 (July 1996): 486CrossRefGoogle Scholar.
21 This was included in the Wetboek van Koophandel [Commercial Code] (The Hague, 1838). The corporate governance of public companies is discussed in Jong, Abe de and Röell, Ailsa, “Financing and Control in the Netherlands,” in A History of Corporate Governance around the World, ed. K., Randall Morck (Chicago, 2005), 467–506Google Scholar.
22 “Wet van den 17den November 1876, tot Regeling der Coöperatieve Vereenigingen,” [Law of the 17th November 1876, to regulation of cooperative societies], Staatsblad van de Koninkrijk der Nederlanden 227 (Nov. 1876). No legal history exists for Dutch cooperative associations. The partnership form (commanditaire vennootschap) also permitted a degree of ownership dispersion and was popular among banks that originated as family firms wishing to bring in “silent partners” with no voting rights. It did not permit liability limitation and was not used by middenstandsbanken. See Kymmell, J., Geschiedenis van de Algemene Banken in Nederland 1860–1914, vol. 2a (Amsterdam, 1996), 62–65Google Scholar.
23 The default liability arrangement was unlimited for cooperatives and limited for corporations. But liability arrangements set out in articles of association superseded those from acts of parliament.
24 Déking Dura advocated that founders should avoid the default liability arrangements and instead limit liability to a level that is appropriate to the needs of the organization. Dura, J. Déking, “Aansprakelijheid der Leden van Coöperatieve Vereenigingen,” De Economist 62 (Mar. 1913): 185–232CrossRefGoogle Scholar.
25 Popular options included limiting liability only to the original share issue price; extending liability in proportion to the size of shareholders’ loans; and double liability calculated at par. Besides this, banks could opt for partially paid shares, where the unpaid capital could be called up under stipulated conditions. Middenstandsbanken all treated unpaid capital as an asset, but this was not uncontroversial. See Greup, G. M., De Stortingverplichting van den Aandeelhouder in een Naamloze Vennootschap (Utrecht, 1923)Google Scholar.
26 Shareholders could do so where a bank's articles of association had arrangements for bearer shares, which required fully paid-up capital. However, most banking companies used shareholder lists because they adopted systems of partially paid capital. Accordingly, the wealth of new shareholders had to be scrutinized on share purchase.
27 The law permitted shareholders to pursue directors if a corporation lost 75 percent of its share capital. Article 47, Wetboek van Koophandel. However, E. M. Meyers finds no evidence that this provision was ever used. Meyers, , Aansprakelijkheid en Décharge van Directeuren van Naamlooze Vennootschappen (Purmerend, 1923)Google Scholar.
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29 See Westerhuis, Gerarda and Jong, Abe de, Over Geld en Macht: Financiering en Corporate Governance van het Nederlandse Bedrijfsleven (Amsterdam, 2015), 85–89Google Scholar.
30 For contemporary debates that led to the change in the law, see Meyers, Aansprakelijkheid en Décharge. In their description of the debate, Westerhuis and de Jong in Over Geld en Macht focus on the lack of accounting information available to investors in nonfinancial firms. By contrast, banks had a tradition of publishing their annual accounts. It is these “voluntary” financial accounting data that I use.
32 Williamson would term this a consequence of a “Level 1” institution that is embedded in society and is very slow to change. Williamson, “New Institutional Economics.”
33 Cornelius Bongenaar, a prominent director of a protestant middenstandsbank, opined that Christian banks pay attention to aspects of their customer “beyond just their business needs.” Bongenaar, “Den Heer Corn. Bongenaar, Directeur der Boaz-Bank te Utrecht, Geinterviewed,” Het Middenstandscredietwezen 2 (Jan. 1926): 25.
34 The term “hybrid form” was coined by Williamson to describe the various intermediate organizational governance structures that lie on the spectrum between pure markets or pure hierarchies. I adopt the term to capture the idea that there was a range of governance options available to middenstandsbanken; the standard organizational forms in Dutch law were highly flexible. Williamson, Oliver E., “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” Administrative Science Quarterly 36 (Jun. 1991): 269–96CrossRefGoogle Scholar.
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36 “Stukken betreffende verstrekken van advies aan de minister van Justitie inzake goedkeuring en wijziging van oprichtingsakten, en goedkeuring en wijziging van statuten van middenstandskredietbanken,” various draft statutes, 1907/08, call number 2.06.001: 4563, Archief Directie van Handel en Nijverheid, Nationaal Archief, The Hague (hereafter ADHN). This bank initially had difficulty raising sufficient capital; the share capital goal was lowered from 500,000 guilders to just 10,000. Dekkers, “Opkomst en Ondergang.”
37 “Correspondentie en nota's inzake het samenwerken ter handhaving van de liquiditeit van de Boazbanken en zelfstandige middenstandsbanken,” report, 1942, call number 2.25.68: 14753, Historisch Archief De Nederlandsche Bank, Nationaal Archief, The Hague (hereafter HADNB).
38 “Dossier inzake Coöperatieve spaar en voorschotbank der vereeniging BOAZ Sneek,” statutes, 1909, call number 2.25.68: 15642, HADNB.
39 “Stukken betreffende organisatie en reorganisatie van het middenstandskrediet wezen,” summary report, 1918, call number 2.06.001: 4569, ADHN.
40 The ACBM took on its own business, servicing the larger SMEs that independent middenstandsbanken could not. It operated a small branch network; six such branches existed by 1919. Algemeene Centrale Bankvereeniging voor den Middenstand, Verslag over 1919 (Amsterdam, May 1920).
41 “Stukken betreffende organisatie en reorganisatie van het middenstandskrediet wezen,” statutes, 1908, call number 2.06.001: 4563, ADHN.
42 “Dossier inzake Middenstands Credietbank Neede,” statutes, 1914 and 1929, call number 2.25.68: 14237, HADNB.
43 Borrowers needed to purchase a 20 percent paid-up share in the middenstandsbank in Zeist, a public company; however, this rule was not enforced. Dengerink, A. J., “Een Middenstandscredietbank, Gesticht door de Gezamelijke Organisaties,” Het Middenstandscredietwezen 2 (Jan. 1926): 32–34Google Scholar.
44 “Dossier inzake Boaz-Bank (Ter Aar),” shareholder list, 1923, call number 2.25.68: 14225, HADNB.
45 “Dossier inzake Centrale Boaz-Bank (Amersfoort),” shareholder list, 1922, call number 2.25.68: 14221, HADNB.
46 “Dossier inzake Centrale Boaz-Bank (Barneveld),” shareholder list, 1923, call number 2.25.68: 14218, HADNB.
47 Drafts of the report are located at call number B.002: 327, Bedrijfshistorisch Archief ING, Amsterdam.
48 See Colvin, de Jong, and Fliers, “Predicting the Past,” for a description of this crisis focused on the experience of the 142 largest banks. Our econometric analysis suggests that banks operating highly leveraged portfolios, and attracting larger quantities of deposits, suffered most.
49 Key contributions are Jonker, Joost, “Sinecures or Sinews of Power? Interlocking Directorships and Bank-Industry Relations in the Netherlands, 1910–1940,” Economic and Social History in the Netherlands 3 (1991): 119–32Google Scholar; Joost Jonker, “Spoilt for Choice? Banking Concentration and the Structure of the Dutch Banking Market, 1900–1940,” in The Evolution of Financial Institutions and Markets in Twentieth-Century Europe, ed. Youssef Cassis, Gerald D. Feldman, and Ulf Olsson (Aldershot, 1995), 187–208; Joost Jonker and Jan Luiten van Zanden, “Method in the Madness? Banking Crises between the Wars, an International Comparison,” in Banking, Currency, and Finance in Europe between the Wars, ed. Charles H. Feinstein (Oxford, 1995), 77–93; Joost Jonker, “Between Private Responsibility and Public Duty: The Origins of Bank Monitoring in the Netherlands, 1860–1930,” Financial History Review 3 (Oct. 1996): 139–52; and Jan Luiten van Zanden, “Old Rules, New Conditions, 1914–1940,” in A Financial History of the Netherlands, ed. Marjolein ’t Hart, Joost Jonker, and Jan Luiten van Zanden (Cambridge, U.K., 1997), 124–51.
50 Stoffer, Het Ontstaan van de NMB. For discussion of the history of the Hanzebank in Den Bosch, see also Dekkers, “Opkomst en Ondergang;” and Jacobs, B. and Erp, J. van, “Middenstandskrediet, Bankwezen en het Geruchtmakende Faillissement van de Credietvereeniging ‘De Hanzebank’ te ’s-Hertogenbosch,” in Ius Brabanticum, Ius Commune, Ius Gentium, ed. Broers, E. J. M. F. C., Jacobs, B. C. M., and Lesaffer, R. C. H. (Nijmegen, 2006), 33–59Google Scholar. A history is also included in W. H. Weenink's biography of Willem Beyen, the banker employed by the Dutch government to reform the sector in the wake of the crisis; Weenink, Bankier van de Wereld, Bouwer van Europa: Johan Willem Beyen 1897–1976 (PhD thesis, Universiteit Leiden, 2005).
51 Contemporary academic debate on the function of middenstandsbanken concerned whether there was sufficient demand for their services. See Gerard M. Verrijn Stuart, “Het Middenstandsbankwezen,” Economische-Statistische Berichten (Dec. 1926): 1101–3; and William M. Westerman, “Is een Middenstandsbankbedrijf Nodig?,” Economisch-Statistische Berichten (Apr. 1927): 313–15.
52 The Nederlandsche Bank refused to grant middenstandsbanken access to its bill-discounting business, despite lobbying by prominent politicians. “Stukken betreffende organisatie en reorganisatie van het middenstandskrediet wezen,” letter exchange between Jan Evert Scholten and the Nederlandsche Bank, Mar.-May 1911, call number 2.06.001: 4569, ADHN.
53 Colvin, Christopher L., “Interlocking Directorates and Conflicts of Interest: The Rotterdamsche Bankvereeniging, Müller & Co. and the Dutch Financial Crisis of the 1920s,” Business History 56, no. 2 (2014): 314–34CrossRefGoogle Scholar. See also Colvin, de Jong, and Fliers, “Predicting the Past.”
54 The assessment of contemporary bankers reinforces the idea that any such merger could only have arisen through government intervention. Bongenaar in “Den Heer Corn. Bongenaar” opined that it was unlikely middenstandsbanken would themselves find a way to cooperate due to an “absence of leadership.”
55 Profit-participation certificates were marketed as attractive options for those without the means to pay up their full shareholding. “Dossier inzake toezicht op, en verlening van medewerking aan liquidatie van de Hanzebank De Delft,” various monitoring reports, June-Oct. 1923, call number 2.25.68: 13258, HADNB.
56 The Delft bank attempted to distance itself from Den Bosch in a series of communiqués aimed at the press (such as that of June 1923), but was unsuccessful.
57 Reports in the local newspaper, the Meierijsche Courant, 6 Dec. 1923, were taken up by the national press. Minutes of telephone conversations between central bankers in Amsterdam and their regional branches reveal bank runs at all Hanzebanken. “Dossier inzake toezicht op, en verlening van medewerking aan liquidatie van de Hanzebank De Delft,” minutes of telephone conversations, Dec. 1923, call number 2.25.68: 13258, HADNB.
58 Depositors did not quite lose everything; 15 percent of savings were returned to them in December 1927, with further payouts late into the 1930s. “Dossier inzake toezicht op, en verlening van medewerking aan liquidatie van de Credietvereeniging De Hanzebank,” monitoring report, Dec. 1927, call number 2.25.68: 13260, HADNB.
59 “Correspondentie en notities inzake de oprichting en overname van Middenstandsbanken door de Algemeene Centrale Bankvereeniging,” various monitoring reports, 1922–1923, call number 2.25.68: 14300, HADNB. See also Algemeen Handelsblad, 24 Feb. 1923.
60 Henry Hansmann differentiates two organizational archetypes: those reliant on “market contracting,” such as public corporations, where stakeholders (especially customers) deal with the organization only through contracts; and those reliant on “ownership,” such as cooperative associations, where stakeholders are also owners of the organization. Hansmann, , The Ownership of Enterprise (Cambridge, Mass., 1996)Google Scholar.
61 In option pricing theory, limited liability shareholdings are valued as call options, while extended liability shareholdings are more like put options; see Esty, “Impact of Contingent Liability.” In the pure limited liability case, shareholders can pay debt and keep the profits, or they can walk away leaving the assets and business of an organization to creditors. Thus, limiting liability may result in a principal-agent problem between shareholders and debt holders (i.e., depositors). Unlimited liability, meanwhile, is like a naked put option in that debt holders have full recourse to a bank's own assets and those of its owners. Unlimited liability theoretically disincentivizes risk-taking because shareholders cannot easily walk away from their business.
62 This alternative way to frame the stability implications of different liability regimes is in terms of Stigler's “Coase theorem.” See Stigler, George J., The Theory of Price, 3rd ed. (New York, 1966)Google Scholar, following Coase, Ronald H., “The Problem of Social Cost,” Journal of Law and Economics 3 (Oct. 1960): 1–44CrossRefGoogle Scholar. If bank stability is the ex post revelation of ex ante bank riskiness, then a “Coasian” interpretation is that in the absence of transactions costs, and if liability obligations are clearly assigned, the market can “price” their effects, thereby rendering the exact liability arrangements irrelevant. In practice, this means the composition of a bank's balance sheet in terms of its assets (loans) and liabilities (deposits) is determined by that bank's earlier liability choice. In a Coasian world, shareholder liability does not matter for realized bank risk as all banks would be “equally risky.” See development of this idea in Grossman and Imai, “Contingent Capital.”
63 The main source of financial data are the annual reports of the ACBM, which collects the balance sheets of both affiliated and nonaffiliated banks. These were supplemented by the annual reports of independent banks. All are available at the International Institute for Social History, Amsterdam (hereafter IISH). Also at “Jaarverslag en statuten Algemeene Centrale Bankvereeniging voor den Middenstand 1918–1926,” annual reports, 1918, call number 2.25.68: 8005, HADNB.
64 Camfferman and van den Brand in Broncommentaren 8 argue that prudence and conservatism led to an undervaluation of banks’ reported assets. Banks understated their profits in “good” years, like 1917–1918, channeling their resources into secret reserves, which they used to fund dividends in “bad” years. Despite this issue, published data remain useful because there was oversight from the ACBM in the collection of these statistics; there is no evidence of systematic misevaluation for particular banks; and they represent the information that investors and customers used to inform their decisions.
66 This method compares the sensitivity and specificity of the model. Values of the AUC above 0.5 signify predictive ability better than a random selection. Values between 0.7 and 0.8 are acceptable; between 0.8 and 0.9 excellent; and between 0.9 and 1 outstanding. See Hosmer, David W. and Lemershow, Stanley, Applied Logistical Regression, 2nd ed. (Hoboken, 2000)CrossRefGoogle Scholar.
67 Hansmann, Ownership of Enterprise.
68 Guinnane, Harris, Lamoreaux, and Rosenthal, “Putting the Corporation in its Place.”
69 La Porta, Lopez-de-Silanes, Shleifer, and Vishny, “Law and Finance.”
70 Ron Harris and Naomi R. Lamoreaux, “Opening the Black Box of the Common-Law Legal Regime: Contrasts in the Development of Corporate Law in Britain and the United States in the Late Nineteenth and Early Twentieth Centuries,” Business History (advance online publication 5 Oct. 2018), https://doi.org/10.1080/00076791.2018.1501027.