Published by EH.NET (March 2005)


Luigi De Rosa, editor, International Banking and Financial Systems: Evolution and Stability. Aldershot, UK: Ashgate, 2003. xiv + 267 pp. $99.95 (cloth), ISBN: 0-7546-3294-6.

Reviewed by David A. Zalewski, Department of Finance, Providence College.

In his 2001 Presidential Address to the membership of the Economic History Association, Richard Sylla (2002) observed that financial revolutions had preceded periods of rapid growth in all countries that had evolved into economic powers. What he meant by revolution was that these nations had instituted modern financial systems that fostered the accumulation of physical and human capital. Specifically, this consisted of: “sound public finances and public debt management; stable monetary and payments arrangements; sound banking systems (more generally, institutional lenders); an effective central bank; good securities markets for debt, equity, and money-market instruments; and sound insurance companies (more generally, institutional investors)” (p. 280, emphases added). How did these countries accomplish this? According to Sylla, it has been leaders, such as Alexander Hamilton in the U.S. and Masayoshi Matsukata in Japan, who deeply understood how financial systems should function and had the political skills to implement their visions.

Attaining financial system maturity, however, is not a one-time event that ensures a lengthy period of economic growth. Rather, maintaining what is “sound,” “good,” or “effective” is a continuing process as factors such as political shocks and technological innovation alter the institutional framework in which financial transactions occur. This, in brief, is the theme of the papers in International Banking and Financial Systems, which were presented at a conference sponsored by the Journal of European Economic History and the Banca di Roma. The focus of this collection is an account of the contribution of central banks to financial efficiency and stability in eight European nations from the end of the First World War to the present, and also what their role is likely to be in the near future as global financial liberalization and consolidation continue apace. Overall, despite not having broken any new theoretical or interpretive ground, the book succeeds in describing the forces that drove the evolution of the European financial system during the twentieth century.

The collection begins with two introductory chapters. The first by Peter Mathias opens with a premise — correct in my view — that it is difficult to understand current financial relationships and structures and to make predictions about future conditions without understanding how the system evolved to that point. Moreover, he argue that because financial institutions and central banks are embedded in the economy, it is also necessary to understand the political and economic forces responsible for their development. Accordingly, Mathias organized his brief, but richly-detailed description of these factors around the various international monetary arrangements that characterized the twentieth century. Next, Luigi De Rosa’s short piece provides an overview of the volume, which seems out of place since it covers some of the terrain covered earlier in the Introduction by Cesare Geronzi.

The next part of the book is comprised of chapters on each of the eight countries that are examined in detail. All of the contributions are quite well done and offer an excellent overview of how political and economic events influenced the evolution of these financial systems. Given the length of the time period covered, the amount of factual detail and the depth of the analyses are impressive. As noted earlier, a common theme of the chapters is how the structure and functions of central banks adapted to meet demands imposed upon them by unforeseen external changes. Because of political and cultural differences, in it unsurprising that central banks in Germany and Britain, for example, took separate paths over the same time period. What is missing, however, is the role played by financial leaders — as emphasized by Richard Sylla — with the notable exception of the piece on Belgium written by Ginette Kurgan-van Hentenryk.

The final section of the book presents concise appraisals of recent financial system trends and near-term predictions by prominent central bank officials. As with the historical analyses, the objective is to gauge the impact of these factors on financial stability and efficiency. Several common themes emerge. The first is that there has been both a growing internationalization and consolidation of financial firms recently, largely through mergers and acquisitions that began in the early 1990s. Consistent with the findings from most recent studies of developed economies, the authors argue that financial industries have remained largely competitive despite the increase in global consolidation, and consequently, industry changes have not impeded economic efficiency and growth.

Regarding stability, most of the central bank officials express concern about the heightened risks that accompany consolidation and globalization. These include the growth of risky assets in financial intermediary balance sheets, the increasing use of derivatives and off-balance-sheet activities, an expanding degree of interbank holdings and the associated rise in systemic risk, complications posed by financial consolidation for monetary policy, and potential disruptions to the payments system. Despite these threats, the contributors to this section are confident that both national and multilateral regulators would successfully respond to these rapidly changing conditions. For example, many of them positively cite modifications to the Basle Accord concerning the regulatory treatment of risk as evidence that the supervisory role of regulators has been adapting to changes in the industry.

My only complaint about the book concerns editing, which admittedly is a difficult task for conference proceedings. Although the chapters on the individual countries are excellent, I feel the volume could have been better organized. For example, the chapter on Germany by Carl-Ludwig Holtfrerich is quite well done, but he concentrates less on the stability and efficiency of its financial system than the other authors. Instead, the story centers more on a Phillips Curve analysis between price stability and the behavior of real activity. Moreover, the contribution by Marco Onado begins with a wonderful explanation of the rationale for financial regulation and then a useful overview of how regulation developed in Europe, before he moves on to Italy. What puzzles me is why Onado’s piece is the eighth chapter, since some of its content is related to the material on the other countries. Finally, as noted earlier, some of the introductory narrative is repetitive and could have been streamlined to free space for a concluding chapter that could have tied together the preceding work.

Overall, I find the whole of International Banking and Financial Systems less than the sum of its parts. It is readable, nontechnical, and an excellent source of information about the critical economic and financial developments of the major European countries over the past century. However, the chapters could have been better integrated to tell a more unified story of recent European financial development.

Reference: Richard Sylla, “Financial Systems and Economic Modernization,” Journal of Economic History 62 (June 2002): 277-292.

David A. Zalewski is Professor of Finance and in the Feinstein Institute for Public Service at Providence College. He has published in the Journal of Economic History and in Essays in Economic and Business History and is currently researching macroeconomic policy during the interwar period.