English commercial banks and business client distress, 1946-63

Abstract

The article examines the behaviour of two leading English clearing banks, the Midland and Westminster, during periods of financial distress suffered by a sample of business clients during the early postwar decades. Such periods provide valuable insight into the nature of bank-business relationships at that time for, in a sense, bank reaction during periods of financial difficulty for client firms helps define the limits to bank support and commitment to such firms. The article examines the banks' behaviour within the context of a transaction bank model (as opposed to what might be termed a relationship bank model) and the results are compared with those of an earlier study by the authors of pre-First World War bank practice. The results show that the banks did operate many of the control mechanisms associated with transaction banking and that the proficiency of such controls ensured that the banks' interests remained reasonably secure even for the high risk loans under study. Importantly, however, the evidence also shows that the banks did not exercise a stark choice between, on the one hand, supporting clients while relying upon traditional control mechanisms, and, on the other, withdrawing support. In a significant number of cases, the banks were prepared to invest in gathering more information on a client's business, and in trying to influence the direction of that business. This suggests a more informed and interventionist approach by the banks in these cases compared to the findings in the pre-1914 study. For the sample of cases examined, it seems that while much of the behaviour of the two banks remained consistent with the transaction bank model, compared to our pre-1914 findings there was also a greater tendency towards a more flexible, 'hands-on' approach in extremis. In these cases, English bank behaviour European Review of Economic History, 7, 365-388. Printed in the United Kingdom

The use and impacts of bank support on UK small and medium-sized enterprises

“…From a historical perspective, often a contrast is drawn between ‘relationship banking’ and ‘transaction banking’. In a system dominated by relationship banking, banks invest a great deal of resources in the collection and monitoring of private information and maintain a close, long-term relationship with business clients; whereas in transaction banking, banks treat each loan as a separate transaction and deal with it on its own merits (Baker and Collins, 2003). This leads us to our second hypothesis:H2: The favourable effects of relationship banking on reducing SME financial problems increase over the level of embeddedness of the relationship with bankers.…”

“…There is some interesting debate in the literature as to whether such ‘distressed clients’ actually reflect and respond to the advice given by their banks. However, a longitudinal study of the period 1946–1963 revealed that nearly half of distressed business clients received bank advice and intervention in terms of independent investigation and advice on financial structure, change in management and business details (Baker and Collins, 2003). Binks and Ennew (1997) reported that more than 60 percent of small businesses in the UK are willing to provide information to their bank manager, and are positively inclined to discuss excess borrowing in advance.…”

Should We Redistribute in Insolvency?

“…That banks, with senior priority status, do in fact exercise this control when the debtor is financially distressed, in a way that is beneficial for other creditors, is apparent from empirical studies of banks' orchestration of informal rescues (Armour and Frisby, 2001;Baker and Collins, 2003;Franks and Sussman, 2005). Franks and Sussman (2005: 76-77) found that the average firm in their sample of financially distressed borrowers spent seven and a half months with banks' Business Support Units ('BSU's, or colloquially, 'intensive care'), and that (depending on the bank) about somewhere between half to three quarters of these firms emerged from the BSU without going into formal insolvency proceedings.…”

British Business History: A Review of the Periodical Literature for 2003

“…This study found that while the activities of these banks was consistent with the transaction bank model (the dominant paradigm in their earlier, pre-1914 study), it was also the case that in the post-Second World War period these banks were more prepared to exercise an interventionist policy, particularly for their most distressed clients. 47 …”