Illusion versus Reality: A Comparison of Governance and Outcome in British and German Banking

The banking industries of Britain and Germany have for many years maintained distinct traditions with regard to lending to industry. British banks have viewed firms as customers, lending to them on a short-term basis. German banks, by contrast, have viewed firms as partners, lending to them for long periods of years, buildings up associations, often having representatives on the firms' boards. This has, in turn, encouraged banks to take a long-term view of `industry's' long-term plans, to the mutual benefit of both banking and manufacturing. So, at least, the story goes. In this paper we re-examine that story. First we review the nature of bank lending in Britain. Was it really as short-term as the conventional wisdom suggests? Or is there perhaps in that conventional view some confusion of form with substance? That reexamination comprises the first section. We then consider the difference for the stability of the two banking systems that could result from the contrast in the forms of lending that each practised. This discussion is first analytical, and then illuminated by points from banking history. That comprises the second part of the paper. In the third part we show how these different lending practices had different consequences for their respective economies in a particular episode when (unlike the nineteenth century) both Britain and Germany had fully-developed central banks so that there would be no possibility that the problems we discuss resulted from the lack or embryonic nature of a central bank. In summary, we show that the apparently wide difference in governance between British and German banking, and the substantially different bank-customer relationships that resulted, in fact in most situations produced similar result insofar as bank lending to industry went. When there was a difference, it was in a way which was beneficial to British, not to German, industry. On the basis of this we go on to argue that changes to corporate governance structures should be carefully grounded in what actually happens, rather than what is thought, perhaps on the basis of one or two examples, to happen.