The actors and instruments of the money market: 1890-1913
The main actors at stake in the money market of the time were the central bank, four large deposit banks representing the main liquidity supplier in the economy, local and regional banks, as well as brokers and dealers operating on the stock exchange.
At the center of the system was the Bank of France, a private institution, whose monopoly of notes issue was usually renewed by the Government in exchange for regular improvements. The traditional role of the central bank was that of supporting national trade and manufacturing through promoting an easy access to credit, low interest rates and integrated financial markets.
A second main player of the market was represented by four large deposit banks. They were characterized by national networks of branches, and specialized in short-term activities. These banks, namely Crédit Lyonnais, Société Générale, Comptoir d’Escompte and Crédit Industriel et Commercial, started to specialize their business after the banking crises of the 1880s, namely the Union Générale crash of 1882 and the Comptoir d’Escompte crack of 1889.
They progressively abandoned large investments in industrial projects, and focused on short-term investments. From 1890 in particular, following the evolutions at work in the BoF, they expanded their activity throughout all the country by opening new branches, attracting short-term deposits and supplying short-term credit. The leading bank in this respect was Crédit Lyonnais, followed shortly afterwards by Société Générale and Comptoir d’Escompte (Lescure 2003). Crédit Industriel et Commercial remained essentially a Paris-based bank.
Figure 2 shows the evolution of regional branches for the three main deposit banks and Bank of France, from 1901 to 1913. It represents the number of branches outside Paris and its region at the end of each year. The source is an internal document elaborated by the Department of Economic and Financial Studies of Crédit Lyonnais, called The Album (see Baubeau et al. 2018). No data are available before 1901. During the first 13 years of the 20th century, Bank of France regional branches were multiplied by 1.61 (from 351 to 568), following the evolution started in 1880, while regional branches of the three main deposit banks were multiplied by almost three (from 552 in 1901 to 1515 in 1913).
A third actor of the market can be found in local and regional banks. These banks held 70% of the discount market up to the end of the 19th century (Bouvier 1979). This figure decreased by a half in the first ten years of the twentieth century (Plessis 2001). This loss of market share was mainly due to the expansion of the regional activities of the main deposit banks shown in Figure 2. As a consequence, local and regional banks had to differentiate their business model. They reduced the quantity of commercial-paper-backed loans by increasing long-term loans to local business. This change in business increased their exposure to liquidity risk. They were therefore increasingly dependent on BoF’s assistance to get access to short-term funding in case of need.
Figure 3 shows the weight of commercial portfolio in the balance sheets of regional banks and deposit banks. The source is once again the Album elaborated by the Crédit Lyonnais. No data are available before 1901. I define regional banks those banks having headquarters outside Paris and its region. I count 68 of them in the Crédit Lyonnais Album, which is a source highly representative of the banking system of the time (Baubeau et al. 2018). Figure 3 shows that deposit banks kept their commercial portfolio stable with respect to total assets from 1901 to 1913. On the other hand, the weight of commercial portfolio decreased in 13 years from 46% to 25% of total assets for regional banks. Regional banks were progressively threw out the commercial bills market, and became more illiquid.
Finally, an important segment of the money market took place inside the stock exchange. Commercial banks, as well as liquidity holders in trade and manufacturing, used to invest a part of their short-term assets on the stock exchange. A fourth category of actors at stake was therefore represented by stock market intermediaries. There were two types of them. The agents de change were the official brokers operating on the Paris Bourse. The coulissiers were the brokers-dealers that managed transactions on the Parisian OTC-like market, called the Coulisse. Agents de change and coulissiers borrowed every 15 or 30 days the capital necessary to perform the settlement of forward operations10, providing securities as collateral.
Given this diversity in players, the French money market was characterized by an analogous plurality of instruments. Let us describe in detail three of them: commercial bills, advances on securities, and repurchase agreements.
The most important money market instrument was the commercial bill (Baubeau 2004). This was a written order binding one party (the drawer or tireur) to pay a fixed sum of money to another party (the drawee or tiré) at a predetermined future date, usually in 60 to 90 days. The original parties operated in trade and, to a minor extent, in manufacturing. Regional banks, commercial banks and private bankers invested in these instruments most of their deposits.
By adding theirs as a third signature, they could rediscount the bills at the BoF at need, and convert them instantly to cash. The commercial paper discount mechanism was the milestone of the French banking system, according to the most prominent bankers of the time11. The Bank of France, by statute, could not accept less than three signatures on the paper it discounted. As a consequence, its discount facilities were almost exclusively reserved to banks and bankers. The share of commercial bills coming by individual clients held in BoF’s portfolio was around 5% in the 1880s and increased to no more than 13% in 1913 (Lescure 2003). Therefore, the so-called “escompte direct” (direct discount) represented only a small part of BoF’s business.
Deposit banks, as well as the central bank, also granted advances against collateral. The BoF only accepted French assets of very good quality. The central bank’s advances rate was usually kept above the discount rate by one half to one percentage point as a means to discourage “speculation” as opposed to “national trade”12. Commercial banks, on the other hand, advanced money against both French and foreign collateral. The rates they applied varied on the basis of both securities and borrowers’ quality, but were decided according to the general conditions of the market. The main indicator used by banks as a reference for their loans was the repo rate, or taux des reports13.
The latter was the rate at which banks and other short-term lenders lent money to stock market intermediaries through the reports market. The French historical repo market, or marché des reports, took place inside the Paris stock exchange. In this market, money lenders were mainly banks, manufacturing firms and retailers investing their liquid assets, as well as individual investors14. Money borrowers were bullish traders willing to roll over their open positions, who needed liquidity to do so.
Loans took the form of the sale of an asset coupled with the agreement to repurchase the same asset on the forward market on a specific future date. In practice, they were collateralized loans, during whose validity the lender enjoyed full ownership rights over the underlying security. Every transaction was mediated by an agent de change, a pure broker. Said differently, every loan was centralized.
From the point of view of a commercial bank, reports and advances were very similar. The time span was quite the same: one to three months for advances, two weeks or one month, often renewed, for repos. Collateral assets were the same. What changed were mainly the borrowers. Advances on securities were granted to people engaged in trade and manufacturing15. Repos were loans to brokers, who used the money to perform the settlements of forward operations.
Accordingly, deposit banks applied different conditions to different types of borrowers. Following the BoF, commercial banks applied margins to their loans. They lent an amount of money lower than the market value of the collateral security. The margin amount varied through assets types, from 20% up to 40%, for the less sure collateral. No margins were applied in the repo market, where banks were protected by joint liability among brokers, at least from 1899 on (Ungaro 2018) .
Starting from the second half of the 1890s, deposit banks progressively developed their advances on securities at the expenses of reports. Figure 4 shows the total amount of advances granted against securities and the total amount of funds invested on the repo market at the 31/12 of each year from 1890 to 1913 in the balance sheets of the four main deposit banks. The graph allows to assess the relative development of repos and advances on securities. Repos were progressively outnumbered by advances. The proportion became of 1:3 at the end of the period.
This dynamics had two main reasons. The first has to be sought in the competitive framework of the banking sector. The second in a regulatory change. Let us consider the two elements separately. In 1898, the government passed a new set of regulations reorganizing the financial market16. One of the main points addressed directly the banking system. Banks had to pass through the intermediation of the Parquet for each transaction undertaken on securities listed on the official stock exchange.
This measure meant that banks had to pay a commission fee plus the financial transaction tax (FTT) for each repo transaction undertaken on a listed security. The same did not apply to advances, as they were not considered stock market operations. Therefore, advances were not subject to the FTT or to brokers’ stamp duties (Allix 1901, p. 156). Commercial banks, starting from Crédit Lyonnais, the market leader, had therefore an incentive to
15 National Monetary Commission, Document No. 405, Interviews with M. Ullmann, Director of the Comptoir d’Escompte, and with Baron Brincard, administrateur délégué and other officials of the Crédit Lyonnais.
Table of contents :
Chapter 1. Do Central Clearing Parties Reduce Risk on Repo Markets?
2. Historical Background
2.1 Market Microstructure
2.2 The Reform
3. Accounting for the dispersion of repo rates.
5. Empirical Strategy
7. A side effect of the reform
Newspapers and press
Figures and tables
Chapter 2. How does the bank lending channel work? Monetary policy transmission in France, 1890-1913.
3. The actors and instruments of the money market: 1890-1913
5. Monetary policy transmission: econometric analysis
Discount vs. Advances
Banque de France Archives (BFA)
Crédit Lyonnais Archives (CLA)
French National Archives
Archives de la Compagnie des Agents de change près de la Bourse de Paris (CAC), at the Centre des Archives Economiques et Financières
Chapter 3. Rationing Credit during a War
The Political Economy of a Missed LOLR Intervention
3. The Great Financial Crisis of 1914
3.1 The Panic
3.2 The Stock Exchange
3.3 The first loan: unblocking capitals
3.4 The second loan and the settlement – September 1915
4. Empirical tests
Newspapers and financial press
Figures and Tables