On the Origins of Universal Banking : An Analysis of the German Banking Sector 1848 to 1910

Banking systems have historically evolved toward their present state in response to particular economic or institutional challenges and through legislative or regulatory intervention. Drawing on the evolution of the German financial system toward universal financial intermediation in the second half of the 19th century, universal banking is shown to result from a particular contracting problem. Here, the interaction of financial contracting, investment in organizational skills, reorganization and liquidation of financial intermediaries may lead to universal banking and industry concentration as an equilibrium outcome. Two different perspectives are presented. First, universal financial intermediation is argued to have resulted from a search for equilibrium that is to be interpreted as quot;learning by banking.quot; Second, politically motivated liquidity constraints and scarcity of managerial skills are shown to imply a concentrated universal banking system as equilibrium outcome. Drawing on these results, the stability of financial systems, the duality between markets for financial claims and managerial skills and some implications for banking reform are discussed