Analyzing Northern European banking systems in
times of The Great Depression
Bachelor Thesis
by
Rick H.G.T. Broeren
Author: Rick H.G.T. Broeren
Superior: N.R.D. Dwarkasing
Title page
Title thesis:
Analyzing Northern European banking systems in times of The
Great Depression
Name student:
Rick H.G.T. Broeren
Administration number:
647296
Study program:
Premaster Finance
Type of thesis:
Bachelor Thesis
Name supervisor:
N.R.D. Dwarkasing
Date of submission:
May 26th 2011
2
Content
1 Introduction………………………………………………………………………….…….…5
2 Literature review…………………………………………………………………….…….…8
2.1 Causes of The Great Depression……………………………………………….…..8
2.1.1 The Treaty of Versailles………………………………………………….8
2.1.2 The gold standard………………………………………………………...8
2.1.3 Political influences……………………………………………………….9
2.1.4 Organization of banks……………………………………………………9
2.2 Actions to end The Great Depression…………………………………………….10
2.3 Causes within the banking sector …………...……………………………….……10
2.3.1 Illiquidity & insolvency………………………………..…………….….10
2.3.2 Impact on Northern Europe…………………………….…….…………11
2.3.3 Banking structure …………………………………………….…………12
3 Method & Data…………………………………………………………………….………..13
3.1 Research method………………………………………………….………………13
3.2 Data collection ……………………………………………………………………15
4 Empirical research…………………………………………………………….…………….16
4.1 Germany…………………………………………………………………………..16
4.1.1 Liquidity ratio……………………………………………..…………….16
4.1.2 Solvency ratio……………………………………………….…………..17
4.1.3 Banking structure……………………………………..…………………18
4.2 The Netherlands………………………………………..…………………………19
4.2.1 Liquidity ratio………………………..………………….………………19
4.2.2 Solvency ratio………………………………………….………………..20
4.2.3 Banking structure……………………………………….……………….21
4.3 Great Britain………………………………………………………………………22
4.3.1 Liquidity ratio………………………………………….………………..22
4.3.2 Solvency ratio…………………………………...………………………23
4.3.3 Banking structure……………………….…………………….…………24
4.4 Cross-country analysis……………………………………………………………25
5 Conclusions…………………………………………………………………………………28
5.1 Germany………………………………………………………..…………………28
3
5.2 The Netherlands……………………………………………………..……………28
5.3 Great Britain………………………………………………………………………28
5.4 Cross-country……………………………………………………..………………28
6 References…………………………………………………………………………………..30
4
1
Introduction
There have been several banking crises all over the world in the banking history. Most of
them existed for a short period of time. Eventually the damage in the banking system would
be restored, leaving in general several banks with serious problems facing bankruptcy. During
The Great Depression of 1931, a lot of banks had gone bankrupt in Germany and its effects
resulted in a lot of banks closing in Northern Europe and the United States. According to
Friedman and Schwartz (1963), this crisis existed out of four consecutive banking crises
creating a devastating impact on the world economy. During the 1930s Germany was not only
important for the world economy because of its size and industrial economy, but also because
of their financial situation. American banks invested a lot of capital in European deposits and
financed German debts after World War I and were therefore also severely hit by the
spreading crisis at that time.
An exceptional amount of over 9000 American banks bankrupted between 1930 and 1933,
taking about 30% of the total amount of American banks in that period for its account
(Verdée, 2008). As this depression had its hardest hit in the United States, also Europe felt
heavy consequences because of the crisis. Therefore economists indicate that it is of great
importance that there is an explanation for this international banking crisis.
Economists try to answer this question for many decades, but their opinions about what really
caused The Great Depression diversify in some way. Economists do agree on certain factors
having great influence on what happened in 1931, such as the role of gold, liquidity problems
and “panics” (bank runs) causing a big part of the crisis. Besides factors in the „banking‟
crisis (mainly caused by continuous withdrawals from depositors), Germany also faced
currency problems at the same time. Germany experienced quick changes in the value of their
currency due to speculations in the foreign exchange market.
According to Grossman (1993), the structure of a bank had great influence on the
vulnerability of a bank. United States banks were largely based on “unit banking”, which
means that only one establishment per bank was allowed. Expansion for banks was
prohibited, causing banks being extra vulnerable for shocks in the US economy. On the other
hand, Germany based their banking system on “state central banks” and “universal banks”
5
(Baums and Gruson, 1993). The state central bank indicates one big central bank for each
state that was owned by the state. Germany counted 16 central banks. A universal bank
participates in many banking activities known as commercial banking and investment
banking. European and American banks participated in these banking activities.
As Germany was largely hit by the crisis and being a country of size, it also affected other
parts of Europe besides the US. Therefore it will be interesting to look at causes of The Great
Depression for surrounding Northern European countries.
This research will focus on the organizational situation of Northern European banks (The
Netherlands, Germany and Great Britain) slightly before and after The Great Depression.
Next to Germany, the crisis also affected other parts of Northern Europe. Therefore it will be
interesting to look at the banking situation of Northern European countries during the 1930s.
Literature review will give insight in what caused The Great Depression and which of these
causes are related to the banking system of Northern European banks. The major causes in the
banking structure are determined as following: liquidity problems, insolvency and banking
structure.
Comparing these factors empirically between different Northern European countries over
different time periods, changes in the structure of banking systems will be analyzed. The time
periods will cover 1929 till 1930 and 1934 till 1935. The financial data that will be used for
those time periods is scanned paperwork from original German Reich documents. It is
nowadays published in an online magazine archive.
To get more insight into changes in the structure of the Northern European banking systems,
it is important to research how those banks were financially organized before 1931 and what
differences were distinctive for banks in The Netherlands, Germany and Great Britain.
Therefore the main research question will be: “In what way did the structure of banking
systems change in Northern Europe because of The Great Depression in 1931?” Changes in
the banking systems can be identified by comparing the „original‟ organizational banking
situation with the situation of a few years after The Great Depression regarding the
determined causes. The crisis of 1931 was not the last crisis in the international banking
history. After gaining insight into possible organizational changes in the banking systems, it is
questionable whether these changes really prevented future banking problems. But this is left
for future research.
6
The further structure of this research is divided in a total of 4 more chapters. Chapter 2
contains a literature review. It will provide information about what caused The Great
Depression and which of these causes are related to the banking system as indicated by
existing literature. The factors that will be used for this research are explained by theoretical
background information. Additional, chapter 2 contains information about what actions were
undertaken to solve the crisis and why it did not help. Chapter 3 contains the methodology. It
shows how the research will be done and what data will be used. The empirical research in
chapter 4 contains the practical research as explained in the methodology. Eventually, chapter
5 will provide conclusions about the findings of this research and will give implications for
further research.
7
2
Literature review
2.1 Causes of The Great Depression
This sector will discuss the main causes of The Great Depression. Different factors played an
important role regarding the depression. They will be discussed in this paragraph and will
mainly focus on Germany because of its important role regarding The Great Depression.
2.1.1 The Treaty of Versailles
The origins of The Great Depression largely lie in the disruptions of the First World War
(Temin, 1991). The Treaty of Versailles of 1919 was a heavy burden for Germany. Next to
military restrictions and territorial changes, Germany had to pay a compensation regarding the
war with a total sum of 269 billion gold marks (equivalent to 100,000 tonnes of pure gold or
US$ 64 billion in that time) to be paid in 42 years. Economists knew this was a payment that
was impossible to fulfil and economic consequences were expected. In 1921 the bill was
reduced to 132 billion Reichmarks (US$ 442 billion compared to 2011). After 1929 the total
sum to be paid, had already declined by over 50%, but this bill caused a part of the enormous
inflation that followed. Money totally lost its value. The recovery payments were eventually
completed in 1989.
2.1.2 The gold standard
According to Bordo and Schwartz (1984), the role of gold was a significant factor causing
The Great Depression. The gold standard started in 1821. It was a system in which a country
had to have as much gold reserves compared to the value of paper currencies. The gold
standard indicates free flow of gold between individuals and countries (Temin, 1991). It was
controlled by monetary authorities. As paper money was tradable for gold at any time,
confidence in the stability of exchange rates was created. By 1931, gold did not circulate in
most countries anymore. In that year, Great Britain and Scandinavia were the first countries
that quit the system creating uncertainties in exchange rates. Countries were continuously
producing more paper money until there was not enough gold to equal the corresponding
value. People were not sure anymore of the possibility to trade money for gold at any time.
Fluctuations in the exchange rates were the result (Eichengreen and Temin (2000).
7
2.1.3 Political influences
From 1918 till 1933 Germany experienced the “Weimar Years”. During those years, Germany
was the second largest industrial nation, so industry was a very important factor in the
German economy. The year 1928 was seen as the last depression-free year before the crisis
really began. After a tremendous inflation, the German industry experienced a heavy
depression. Unemployment increased and only about 25% of the German industrial
production had been exported (Hardach, 1980). Between 1928 and 1932 German exports
declined from 12.3 billion Reichsmark to 5.7 billion Reichsmark, causing continuously
shutdowns and layoffs. In 1932 the unemployment rate almost reached 31%. A big increase
compared to the 7% unemployment rate in 1928. The so-called “golden years” clearly
levelled off. Eventually, the dictatorship of Adolf Hitler began, giving a boost to the German
economy by (among more employment opportunities) introducing the Volkswagen in 1932.
The aim of the Volkswagen was to create a cheap car for the German people having a positive
effect on the banking crisis Germany was dealing with.
2.1.4 Organization of banks
Next to political influences Germany experienced structural weaknesses in their banking
system. In the nineteenth century the main purpose of the German banks were to finance the
country‟s industrialization (Hardach, 1980). The system represented a combination of
commercial banking, investment banking and investment trust, also known as “Universal
banking”. During the twentieth century the German banking system was controlled by central
banks (Baums and Gruson, 1993) which indicates one state-owned central bank for each state.
This bank acted as a lender for the rest of the banks. The great dependability on only several
central banks was analyzed as a structural weakness.
Schwartz and Friedman (1963) stated that the illiquidity of these banks (caused by debts due
to World War I) led to the withdrawal of European deposits, also known as “bank runs”.
Depositors massively requested their deposits being afraid to lose their money. This
“contagion of panics” would cause the further collapsing of the German banking. By 1929 the
ratio between the banks‟ own funds and foreign capital deteriorated to 1:10 for private banks
and to 1:15 for the “Big Banks” of Berlin (Hardach, 1980). The will to save in Germany
declined, so the needed funds had to come from abroad. The United States became the big
lender for Germany which eventually had a short-term debt about 27 billion Reichsmark.
9
After “Black Thursday” on Wall Street on 24 October 1929, the American lending to
Germany resulted in the American banking crisis.
2.2 Actions to end The Great Depression
International assistance was necessary to repair the crisis. Fifteen allied central banks
provided a direct credit of $150 million (Hardach, 1980). As time was already wasted, the
people‟s confidence had to be restored as quickly as possible. This money injection, called
“The Hoover Moratorium” did not come into effect before the 7th of July 1931, although the
announcement was made on the 19th of June. The concern among the nations was growing.
Eventually, the money injection came too late. On the 13th of July 1931, the Danat Bank, one
of Germans biggest banks, declared its insolvency. Other large banks faced the same scenario.
The German government was forced to declare two “bank holidays” (14th and 15th of July).
On those days banks were not doing any business. Monetary and bank transactions in
Germany were brought to a standstill. On the 16th of July 1931 tight restrictions of transfers
between banks were enforced to reactivate stability throughout the troubled sector.
2.3 Causes within the banking sector
2.3.1 Illiquidity & insolvency
Temin (1976) states that the insolvency of banks caused the bad economical situation. Unlike
illiquidity, insolvency means the lack of capability to pay all obligated debts with all available
assets. Illiquidity however, indicates that the short-term debts of a bank cannot be paid
regarding the cash capability of the bank. So regarding the two causes one important
difference is time. Secondly the calculation of the two ratios differ from each other. The
liquidity ratio can be calculated in different ways using current assets and cash versus short
debt while the calculation of the insolvency ratio includes the total own equity and the total
debt.
Apparently a bank can go bankrupt while it is insolvent. In such a case bankruptcy seems not
forced, but voluntary regarding to the long term perspective (Richardson, 2006). A bank is
solvent when the bank is able to finance at least 50% of their total debt with their own equity.
When this ratio is lower the bank is officially insolvent. The bank can declare bankruptcy
when the insolvency ratio is so low that the own equity can not finance the debts anymore
with respect to the long term perspective.
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Regarding the given definitions, when a bank is insolvent, then it is illiquid (or else, it would
have just sold enough assets to cover the debt). But if a bank is illiquid, then it does not have
to be insolvent because it is possible to borrow on short-term to cover the debt instead of
selling all of the assets.
Richardson (2006) stated that bank failures can be divided into different categories.
Regarding insolvency and illiquidity, it respectively resulted into terminal and temporary
suspensions. In the case of a terminal suspension a bank closed its doors to the public,
surrendered its charter and repaid depositors. During a temporary suspension, the bank would
soon be reopened for business. By this suspension, a bank is able to gain new trust when
reopening. 40% of all institutions which closed their doors to depositors would soon be
reopened for business. Eventually during 1932 and 1933 only a small fraction of these banks
reopened.
Richardson states that illiquidity and insolvency were not the sole sources of the bank
distress, but that they were consequences of The Great Depression. Many banks did not
experience deposit losses, but failed because the value of their assets declined until the value
of their liabilities exceeded the value of their resources. Secondly, banks had assets in good
condition, but closed their doors because their depositors demanded funds, which the bank
could not supply. It could not quickly convert assets into cash and it had a lack of access to
sufficient credit.
2.3.2 Impact on Northern Europe
The failure of German banks had great impact on banks of Northern European countries. The
depression lasted very long for The Netherlands, facing their low point of The Great
Depression between 1933 and 1936 which is significantly later than most other countries.
This is partly because of the structural characteristics of the Dutch economy and partly
because the Dutch government refused to drop the Gold standard. Great Britain and Germany
dropped the gold standard earlier which already created a lot of uncertainty. However,
Wigmore (2004) states that there are international explanations for the banking crisis in
Northern European countries. Next to the gold standard a cause for the crisis, the continued
bankruptcies in the US would have also had a great influence on the Northern European
banking situation. Northern European countries experienced bank runs. Depositors requested
their money massively. This automatically resulted in illiquidity and insolvency.
11
2.3.3 Banking structure
The most common types of banks are private banks, commercial banks and investment banks
(Carlson and Mitchener, 2005). The combination between commercial banks and investment
banks (universal banking) was very common during The Great Depression. Commercial
banks provide transactional accounts, savings and time deposits where investment banks
assist individuals, corporations and governments in raising capital. Private banks are simply
owned by either an individual or general partners without any influence of the government.
But what factors are really essential when analyzing a country‟s “banking structure”? Several
economists like Calomiris (1995) and Grossman (1994) argue that the stability of the banking
structure played an important role causing The Great Depression. Grossman (1994) considers
three major aspects of banking structure: branching, concentration and bank size. Branched
banks should be less likely to fail than unit banks because of its diversity in loan portfolio. A
branch system provides seasonal diversification easing the stringency in money centres.
Next to branching, concentration leads to greater profitability. With a high concentration,
industrial organization theory (Grossman, 1994) suggests that firms may earn economic profit
and therefore may be less likely to fail. Also bank size is an important aspect as a big bank
can easily diversify its investment portfolios and thereby reduce its risk. Capitalized banks
will be better able to absorb losses from any nonperforming asset than banks that are less
highly capitalized. Bank size can also indicate that a bank is „too big to fail‟.
This research will partly focus on the three aspects branching, concentration and bank size.
They will be analyzed regarding to The Netherlands, Germany and The Great Britain slightly
before and after The Great Depression. In this way, changes in Northern European banking
systems will be analyzed to subsequently conclude in how far The Great Depression had its
impact on the country‟s banking systems regarding the determined factors.
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3
Method & Data
3.1 Research method
The major determinants regarding a failing banking structure will be analyzed. These major
causes are determined as following: illiquidity, insolvency and three factors within a
country‟s banking structure. The three factors are branching, concentration and bank size. The
research concerns the following Northern European countries: The Netherlands, Great Britain
and Germany. The factors will be analyzed within two different periods. 1929 till 1930 and
1934 till 1935. By comparing these factors empirically, changes in the structure of banking
systems will be analyzed.
First, a proper overview will be provided of what factors will exactly be analyzed in this
research. The banking system of three Northern European countries will be analyzed, namely
The Netherlands, Germany and The Great Britain. Regarding this research, a country‟s
banking system will be divided into three different factors.

Illiquidity

Insolvency

Banking structure
o Branching
o Concentration
o Bank size
To subsequently analyze a country‟s banking structure, that factor is divided into three sub
factors based on the theory of Grossman (1994). Every factor will be analyzed over two
different periods. The first period will cover 1929 till 1930 and the second period will cover
1934 till 1935. A year‟s measurement will take place at the end of the year, so each period
contains two snapshots. The second period will be analyzed a few years after 1931, the year
that The Great Depression had its hardest hit in most countries. This is done to make sure that
the complete impact of The Great Depression on a country‟s banking system has been taken
into account. This statement will not fully apply to The Netherlands, because the first
consequences of the crisis reached The Netherlands in 1931 and having its low point a few
13
years later instead of 1931 as most countries. It is very likely that Dutch banks were not
recovering in 1934 and 1935, but still experience heavy consequences of the crisis.
It is relevant to know how the different factors will be calculated. In this way, it is clear which
exact data from the data collection is needed. The liquidity ratio can be calculated in two
different ways, the current ratio and the quick ratio. It is calculated as following.
Current Ratio =
(Current assets + Cash) / Short Term Liabilities
Or
(Total assets – Financial fixed assets) / (Total Liabilities – Own Equity
– Long Term Liabilities – Net Profit)
Quick Ratio =
(Current assets + Cash – Stock) / Short Term Liabilities
The obvious difference is when calculating the quick ratio that the value of the stock is
reduced. As the quick ratio is defined as the liquidity ratio on a very short term instead of just
short term, the stock is reduced. In most cases it is questionable if stock can be sold on short
term or converted to cash somehow. So when calculating the liquidity ratio on a very short
term, the quick ratio will be applied including the reduced stock as an uncertain factor for
raising cash. But in case of banking, in general, stock is not applicable. Therefore, only the
current ratio will be used for this research. The current ratio shows how often a bank can pay
off its short term liabilities with their current assets and cash. When this ratio is lower than 1,
it means that the bank is illiquid. The current assets include debtors and additional short term
receivables. The cash contains the money on the bank and the actual paper money that is
available.
The solvency ratio calculates if a bank is solvent or not. It shows how often a bank can pay
off all of its liabilities when selling all assets against the value stated on the balance sheet. It is
calculated as following.
Solvency ratio = (Own Equity + Net Profit) / (Total liabilities – Own Equity – Net Profit)
Nowadays, when a bank is not able to finance 50% of their total liabilities with own equity,
then the bank is insolvent. This means that when the solvency ratio decreases below 0.5 a
14
bank is insolvent. But this standard did not exist during the 1930s. There were no common
rules regarding this financial ratio.
To analyze a country‟s banking structure; this factor is divided into the three different sub
factors: branching, concentration and bank size. Theoretically branching will be defined as the
average amount of branch areas per bank. Bank concentration will be defined as the average
population per bank. The factor bank size will be measured by the average amount of total
assets the banks own.
Based on certain literature reviews, a realistic hypothesis will be given. Before The Great
Depression, it did not take much to make a bank go bankrupt as they were not very liquid and
solvent. A logical consequence would be that the liquidity ratio and the solvency ratio would
increase mandatory because of The Great Depression. It would be implemented as a rule that
a bank may not do business when the ratios are decreasing below the agreed value.
Regarding the Northern European banking structure, more branched banks will exist after The
Great Depression. Diversity in loan portfolio indicated that the banks can spread their risk.
There will also be more concentrated banks after The Great Depression than slightly before.
The high economic profit ensures their existence. It is also likely that a lot of banks remain
with a great bank size as they are too big to fail. They can also diversify a lot in investment
portfolios and thereby spread there risk in certain investments.
3.2 Data collection
To determine the liquidity ratio and the solvency ratio for Germany, balance sheets from the
years 1929, 1930, 1934 and 1935 are needed. Of course during the time of The Great
Depression, there was no digitalisation of documents. These documents are nowadays
available on an online German magazine archive where all scanned financial documents are
posted. Regarding the Netherlands and Great Britain the League of Nations (1934) and Van
Oss‟ Effectenboeken (1935 and 1936) provide useful financial information.
The information that is required to analyze the banking structure of Northern European
countries will be based on a scientific research of Grossman (1994): “The Shoe That Didn‟t
Drop: Explaining Banking Stability During the Great Depression”. In this paper Grossman
analyzes 25 countries across Europe and North America just before The Great Depression to
determine if there was a lack of stability in the banking structure of these countries that could
be responsible for the crisis.
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4
Empirical research
Regarding the empirical research the banking system of three Northern European countries
will be analyzed. These countries are Germany, The Netherlands and Great Britain. A
country‟s banking system will be analyzed by different determined financial key figures.
They are calculated in the following sections. The last section provides a cross-country
analysis in which the Northern European countries are compared with each other before and
after The Great Depression.
4.1 Germany
In this section the German banking system will be analyzed by calculating the liquidity ratios,
the solvency ratios and the factors branching, concentration and bank size for the years 1929,
1930, 1934 and 1935.
4.1.1 Liquidity ratio
In the following part the liquidity ratios for German banks are covered during the years 1929,
1930, 1934 and 1935. All types of banks are covered within the calculations. Therefore the
results will be an average of all German banks. To calculate the liquidity ratios, two annual
balance
sheets
on
an
online
magazine
archive
are
used
(http://www.digizeitschriften.de/dms/img/#navi, page 330 and 331).
Liquidity ratio (in Reichsmark)
1929
Total assets
41,894,508,800 43,227,590,700 39,043,600,000 41,535,400,000
- Financial fixed assets
14,704,903,500 16,787,580,000 15,654,900,000 17,485,700,000
Current assets
27,189,605,300 26,440,010,700 23,388,700,000 24,049,700,000
Total Liabilities
41,894,508,800 43,227,590,700 39,043,600,000 41,535,400,000
- Own Equity
- Long Term Liabilities
- Net Profit
Short Term Liabilities
3,520,597,000
1930
3,541,793,500
1934
4,323,200,000
1935
4,808,500,000
13,291,356,200 15,281,328,000 15,655,900,000 15,962,500,000
263,277,400
227,950,800
148,000,000
179,600,000
24,819,278,200 24,176,517,900 18,916,500,000 20,584,800,000
16
Liquidity ratio 1929 =
27,189,605,300 / 24,819,278,200 = 1.0955
Liquidity ratio 1930 =
26,440,010,700 / 24,176,517,900 = 1.0936
Average liquidity ratio 1929 and 1930 =
(1.0955 + 1.0936) / 2 = 1.0946
This means that the average liquidity ratio for 1929 and 1930 is almost 10% greater than 1.
Therefore the German banks are liquid on an average level during the period of 1929 till
1930.
Liquidity ratio 1934 =
23,388,700,000 / 18,916,500,000 = 1.2364
Liquidity ratio 1935 =
24,049,700,000 / 20,584,800,000 = 1.1683
Average liquidity ratio 1934 and 1935 =
(1.2364 + 1.1683) / 2 = 1.2024
The average liquidity ratio for 1934 and 1935 is more than 20% higher than 1 which means
that the German banks are liquid on an average level during these two years. Compared to
1929 and 1930 this liquidity ratio is 10.78% higher. This means that German banks were
more liquid during 1934 and 1935 compared to 1929 and 1930.
Financial fixed assets include mortgage receivables, long term loans versus local coverage,
land, buildings, inventory and some additional assets. Current assets must be able to be
converted into cash within one year. Own equity includes own capital and several reserves.
Long term liabilities include long term savings and mortgages. The remaining short term
liabilities include creditors and short term obligations. The content of these terms are also
applied to the figures of The Netherlands and Great Britain.
4.1.2 Solvency ratio
The solvency ratio of Germany will be calculated by dividing the own equity plus the net
profit through the total liabilities excluding the own equity and the net profit. In case of
insolvency, the net profit can be used to redeem debt. To calculate the German solvency ratios
for the four years, two annual balance sheets on the online magazine archive will be used.
(http://www.digizeitschriften.de/dms/img/#navi, page 380 and 381).
17
Solvency ratio (in Reichsmark)
1929
1930
1934
1935
Own equity
3,520,597,000
3,541,793,500
4,323,200,000
4,808,500,000
+ Net Profit
263,277,400
227,950,800
148,000,000
179,600,000
3,783,874,400
3,769,744,300
4,471,200,000
4,988,100,000
Total
Total Liabilities
- Own Equity
- Net Profit
41,894,508,800 43,227,590,700 39,043,600,000 41,535,400,000
3,520,597,000
3,541,793,500
4,323,200,000
4,808,500,000
263,277,400
227,950,800
148,000,000
179,600,000
Total
38,110,634,400 39,457,846,400 34,572,400,000 36,547,300,000
Solvency ratio 1929 =
3,783,874,400 / 38,110,634,400 = 0.0993
Solvency ratio 1930 =
3,769,744,300 / 39,457,846,400 = 0.0955
Average solvency ratio 1929 and 1930 =
(0.0993 + 0.0955) / 2 = 0.0974
This means that, on an average level, 9.74% of the total liabilities can be redeemed during
these two years including the long term liabilities.
Solvency ratio 1934 =
4,471,200,000 / 34,572,400,000 = 0.1293
Solvency ratio 1935 =
4,988,100,000 / 36,547,300,000 = 0.1365
Average solvency ratio 1934 and 1935 =
(0.1293 + 0.1365) / 2 = 0.1329
This means that, on an average level, 13.29% of the total liabilities can be redeemed during
these two years including the long term liabilities. Compared to 1929 and 1930 this is an
increase of 3.55%. This means that German banks became a little bit more solvent during
1934 and 1935 compared to 1929 and 1930.
4.1.3 Banking structure
Three factors will be analyzed in this section: branching, concentration and bank size.
Branching will be calculated by the average amount of different branch areas in Germany.
The factor concentration will be measured by the average population of German banks. The
bank size will be calculated by the average amount of total assets.
18
Year
1929
1930
1934
1935
Branch areas
-
3.06
-
-
Population
-
1,761,000
-
-
Total assets
41,894,508,800 43,227,590,700 39,043,600,000 41,535,400,000
(Sources: Grossman, 1994 and http://www.digizeitschriften.de/dms/img/#navi, page 330 and
331)
Due to source limitations information regarding branch areas and bank population was not
available for the years 1929, 1934 and 1935. Therefore a comparison between the periods
before and after The Great Depression cannot be made for those two factors. However, only
the factor bank size, determined by the total amount of assets, will be fully analyzed. On
average, Germany‟s total assets decreased with 5.34% which is not much. This does not mean
that Germany‟s total banking structure remained stable after The Great Depression. Certain
money injections by allied countries could easily have influenced the amount of total assets.
Besides, the other two factors branch areas and bank population are not taken into account
which should also give insight in Germany‟s banking structure. What is prominent is the
average amount of branches of 3.06 which is very low. So there is not a lot of diversification
in investment portfolios which indicates that German banks were operating very risky.
When analyzing Germany with a general view, the German banking system seemed instable
before the crisis regarding the factors solvency ratio, branching and bank concentration.
Furthermore, mainly small changes are noticed within the German banking system. Germany
may have restored their crisis damage very quickly after their low point of The Great
Depression and/or the allied financial support played a key role influencing the figures within
this research. But analyzing these factors is left for future research. Realizing drastic changes
in such short period of time during The Great Depression is not easy, certainly when the trust
in banks has decreased. However, it is noticeable that the German liquidity ratio increased
with almost 10% after The Great Depression which is quite much in terms of liquidity.
4.2 The Netherlands
4.2.1 Liquidity ratio
In this section the liquidity ratios for Dutch banks are covered during the years 1929, 1930,
1934 and 1935. The information regarding 1929 and 1930 is used from the League of Nations
19
(1934); Commercial Banks, 1925-1933. The information regarding 1934 and 1935 is used
from Doorne, J (1935 and 1936); Van Oss‟ Effectenboek.
Liquidity ratio (in Gulden)
1929
1930
1934
1935
Total assets
1,982,700,000
2,055,000,000
1,054,748,133
1,033,060,522
952,400,000
1,062,800,000
6,191,024
6,058,577
Current assets
1,030,300,000
992,200,000
1,048,557,109
1,027,001,945
Total Liabilities
1,982,700,000
2,055,000,000
1,054,748,133
1,033,060,522
- Own Equity
398,000,000
398,300,000
28,807,915
29,724,884
- Long Term Liabilities
458,100,000
510,500,000
9,437,240
10,104,452
27,500,000
21,400,000
710,965
800,908
Short Term Liabilities
1,099,100,000
1,124,800,000
1,015,792,013
992,430,278
Liquidity ratio 1929 =
1,030,300,000 / 1,099,100,000 = 0.9374
Liquidity ratio 1930 =
992,200,000 / 1,124,800,000 = 0.8821
- Financial fixed assets
- Net Profit
Average liquidity ratio 1929 and 1930 =
(0.9374 + 0.8821) / 2 = 0.9098
This means that the average liquidity ratio for 1929 and 1930 is almost 10% less than 1.
Therefore the Dutch banks are illiquid on an average level during the period of 1929 till 1930.
Liquidity ratio 1934 =
1,048,557,109 / 1,015,792,013 = 1.0323
Liquidity ratio 1935 =
1,027,001,945 / 992,430,278 = 1.0348
Average liquidity ratio 1934 and 1935 =
(1.0323 + 1.0348) / 2 = 1.0336
The average liquidity ratio for 1934 and 1935 is 3.36% more than 1. Therefore the Dutch
banks are liquid on an average level during the period of 1934 till 1935. Compared to 1929
and 1930, the liquidity ratio increased with 13.6% which is quite much.
4.2.2 Solvency ratio
The solvency ratio of the Netherlands will be calculated in the same way as it was calculated
for Germany. Again information from The League of Nations (1934) is used.
20
Solvency ratio (in Gulden)
1929
1930
1934
1935
Own equity
398,000,000
398,300,000
28,807,915
29,724,884
+ Net Profit
27,500,000
21,400,000
710,965
800,908
425,500,000
419,700,000
28,096,950
28,923,976
1,982,700,000
2,055,000,000
1,054,748,133
1,033,060,522
398,000,000
398,300,000
28,807,915
29,724,884
27,500,000
21,400,000
710,965
800,908
Total
1,557,200,000
1,635,300,000
1,025,229,253
1,002,534,730
Solvency ratio 1929 =
425,500,000 / 1,557,200,000 = 0.2732
Solvency ratio 1930 =
419,700,000 / 1,635,300,000 = 0.2567
Total
Total Liabilities
- Own Equity
- Net Profit
Average solvency ratio 1929 and 1930 =
(0.2732 + 0.2567) / 2 = 0.2650
This means that, on an average level, 26.5% of the total liabilities can be redeemed within this
period including the long term liabilities.
Solvency ratio 1934 =
28,096,950 / 1,025,229,253 = 0.0274
Solvency ratio 1935 =
28,923,976 / 1,002,534,730 = 0.0289
Average solvency ratio 1934 and 1935 =
(0.0274 + 0.0289) / 2 = 0.0282
This means that, on an average level, 2.82% of the total liabilities can be redeemed within this
period including the long term liabilities. Compared to 1929 and 1930 this is a decrease of
89.36% which is very much.
4.2.3 Banking structure
Year
1929
1930
1934
1935
Branch areas
-
24.00
-
-
Population
-
1,305,500
-
-
Total assets
1,982,700,000 2,055,000,000 1,054,748,133 1,033,060,522
(Sources: Grossman, 1994, League of Nations, 1934 and Doorne, 1935 and 1936)
21
Again, due to source limitations information regarding branch areas and bank population was
not available for the years 1929, 1934 and 1935. So a complete comparison regarding the
Dutch banking structure is not possible. What is prominent about the Dutch banking structure
is that the total amount of assets approximately halved in 1934 and 1935 compared to 1929
and 1930 which increased risk for the Dutch banking. The model shown in this section
confirms the fact that The Netherlands did not experience The Great Depression in the same
period than most other countries. Based on this model, around 1930 The Netherlands barely
suffered from the crisis. The average bank size actually slightly increased in 1930 compared
to 1929. However, the crisis certainly had its aftermath in 1934 and 1935. These conclusions
are based on the factor bank size. Drawing conclusions about the Dutch banking structure in
general is not completely possible while certain information about the factors branch areas
and bank population was not available.
In general, The Netherlands was illiquid before The Great Depression. When most countries
already experienced its low point during the crisis, the health of the Dutch banking system
was declining in 1935 instead of improving. Despite the fact that 1935 was a bad financial
year for the Dutch banking system, their liquidity ratio increased with more than 13% in 1935
what is actually remarkable because this country did not reach its recovery phase yet.
4.3 Great Britain
4.3.1 Liquidity ratio
Regarding Great Britain, the League of Nations (1934) is used as main source.
Liquidity ratio (in Pounds)
1929
1930
1932
Total assets
2,238,800,000
2,255,700,000
2,302,300,000
- Financial fixed assets
1,026,500,000
964,600,000
799,100,000
Current assets
1,212,300,000
1,291,100,000
1,503,200,000
Total Liabilities
2,238,800,000
2,255,700,000
2,302,300,000
141,600,000
144,400,000
135,300,000
6,600,000
6,200,000
5,900,000
2,090,600,000
2,105,100,000
2,161,100,000
- Own Equity
- Net Profit
Total Liabilities (not further specified)
22
Liquidity ratio 1929 =
1,212,300,000 / 2,090,600,000 = 0.5799
Liquidity ratio 1930 =
1,291,100,000 / 2,105,100,000 = 0.6133
Average liquidity ratio 1929 and 1930 = (0.5799 + 0.6133) / 2 = 0.5966
This means that the average liquidity ratio for 1929 and 1930 is about 40% less than 1.
However, this ratio does not state that the banks of Great Britain were illiquid. The total
liabilities also include long term liabilities, because the total liabilities are not specified on the
balance sheet that is used (League of Nations, 1934). What can be concluded is that at least
60% of the total liabilities can be redeemed with the current assets.
Due to source limitations financial data from 1934 and 1935 was not available. Therefore
available data from 1932 is used to at least create a comparison between two periods, one
period before and one period after The Great Depression.
Liquidity ratio 1932 =
1,503,200,000 / 2,161,100,000 = 0.6956
Again this ratio does not state that the banks of Great Britain were illiquid in 1932. What can
be concluded is that the current assets increased more than the total liabilities did which is a
positive change. The current assets increased with approximately 20% while the total
liabilities increased with approximately 3%. Therefore the liquidity ratio of 1932 is higher
than the average liquidity ratio of 1929 and 1930. The total liabilities used for Great Britain
are not specified into short- and long term liabilities, so reliable conclusions regarding
liquidity can not be drawn. However, it is a fact that both the total assets and the total
liabilities did not change much during the analyzed years within this section.
4.3.2 Solvency ratio
For the calculations of the solvency ratios, again the League of Nations (1934) is used as main
source.
23
Solvency ratio (in Pounds)
1929
1930
1932
Own equity
141,600,000
144,400,000
135,300,000
+ Net Profit
6,600,000
6,200,000
5,900,000
148,200,000
150,600,000
141,200,000
2,238,800,000
2,255,700,000
2,302,300,000
141,600,000
144,400,000
135,300,000
6,600,000
6,200,000
5,900,000
Total
2,090,600,000
2,105,100,000
2,161,100,000
Solvency ratio 1929 =
148,200,000 / 2,090,600,000 = 0.0709
Solvency ratio 1930 =
150,600,000 / 2,105,100,000 = 0.0715
Total
Total Liabilities
- Own Equity
- Net Profit
Average solvency ratio 1929 and 1930 =
(0.0709 + 0.0715) / 2 = 0.0712
This means that, on an average level, 7.12% of the total liabilities can be redeemed with own
equity regarding this period. The total liabilities include short- and long term liabilities.
Solvency ratio 1932 =
141,200,000 / 2,161,100,000 = 0.0653
As balance sheets of 1934 and 1935 were not available, figures of 1932 are used to make a
comparison between periods before and after The Great Depression. The solvency ratio of
1932 means that 6.53% of the total liabilities can be redeemed with own equity regarding this
period. Compared to 1929 and 1930 this is a decrease of 8.29%. This slight decrease indicates
that the crisis did not have much impact on the solvency ratios of Britain banks. However, the
two ratios are not quite high either.
4.3.3 Banking structure
Year
1929
1930
1932
Branch areas
-
613.44
-
Population
-
2,481,300
-
Total assets
2,238,800,000 2,255,700,000 2,302,300,000
(Sources: Grossman, 1994 and League of Nations, 1934)
The liquidity- and solvency ratios of Great Britain indicate that this country did not suffer
much from The Great Depression. The model in this section actually confirms this
24
conclusion. In 1932 the total amount of assets has increased compared to 1929 and 1930. The
average amount of branch areas is also high compared to Germany and the Netherlands which
indicates that Great Britain had great diversification in their loan portfolio. The risk of Britain
banks is thereby significantly reduced.
4.4 Cross-country analysis
In this section a cross-country analysis will be executed. The Northern European countries
will be compared with each other in times before and after The Great Depression. Using the
information about the analyzed factors in this research, conclusions will be drawn.
Liquidity ratio
Germany
The Netherlands
Great Britain
Before crisis
1.0946
0.9098
(0.5966)
After crisis
1.2024
1.0336
(0.6956)
It is obvious that Great Britain can not fully be taken into account within this part of the crosscountry comparison as the calculations of those liquidity ratios are not as the same as
Germany and The Netherlands due to source limitations. Before the crisis, The Dutch banks
are illiquid. However, German banks faced the consequences of the crisis before The
Netherlands despite of their liquidity. After the crisis all liquidity ratios have increased with
almost the same proportion. For Germany that seems a logical consequence as Germany faced
the worst already in 1931. However, The Netherlands suddenly became liquid during 1934
and 1935 while at that time The Netherlands was still experiencing difficult times. Despite
that, Germany and The Netherlands improved their banking system regarding their liquidity
in times of The Great Depression.
Solvency ratio
Germany
The Netherlands
Great Britain
Before crisis
0.0974
0.2650
0.0712
After crisis
0.1329
0.0282
0.0653
Note the fact that Great Britain‟s after-crisis period covers 1932 instead of 1934 and 1935
what is the case for Germany and The Netherlands. There were no criterion for illiquidity and
insolvency in the 1930s like nowadays. It was permissible to have a low solvency ratio.
Before the crisis The Netherlands had the highest solvency ratio. But after the crisis The
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Netherlands also had the worst solvency ratio with a decrease of almost 90% and still
experiencing consequences of the crisis. Where Germany and Great Britain did not experience
major changes regarding their solvency ratio, the only prominent change between these
countries is that The Netherlands was the country with by far the highest solvency ratio and
within a few years it was the country with the lowest solvency ratio.
Branching
Germany
The Netherlands
Great Britain
Before crisis
3.06
24.00
613.44
Due to source limitations only a cross-country analysis will be made from the period before
the crisis. It actually visualizes the risk that the banks are dealing with. It is Great Britain that
by far has most branching areas and thereby reduces a lot of risk by their diversity in loan
portfolios. On the other hand Germany is dealing with the opposite.
Concentration
Germany
The Netherlands
Great Britain
Average bank population before
1,761,000
1,305,500
2,481,300
Population number
65,100,000
7,884,000
37,000,000
Average bank spread
0.0271
0.1656
0.0671
the crisis
(Source: Jefferies, 2005, Centraal Bureau voor de Statistiek, 2011 and Historical Atlas, 2011)
The average bank concentration indirectly indicates how risky a bank is operating. The less
bank population a bank contains the more influence it has when customers withdraw money
from the bank. A country‟s total population of that year has to be taken into account to make a
representative comparison. It is obvious that Germany has the highest population and that The
Netherlands contains the lowest. The lower the average bank spread, the more small banks are
active in that country and the less large banks are active. Large banks are less likely to fail,
because of the “too big to fail” concept which reduces risk. The amount of banks in a country
is taken into account within a country‟s average bank population. However, the average bank
spread that follows does not indicate exactly how large and how small all banks are that
eventually come to the average number. But it does give a little insight if the banks of a
country gain advantage of the too big to fail concept on an average level. Comparing
Germany, The Netherlands and Great Britain, The Netherlands had the highest average bank
26
spread and Germany the lowest. This does certainly not improve the banking structure of
Germany before The Great Depression.
Bank size
Germany
The Netherlands
Great Britain
Before crisis
RM 42,561,049,750 FL 2,018,850,000
£ 2,247,250,000
After crisis
RM 40,289,500,000 FL 1,043,904,327.5
£ 2,302,300,000
Before conclusions can be drawn regarding this model, the exchange rates in the different
currencies have to be taken into account. Nevertheless, Germany had by far the largest bank
size before and after the crisis what is actually logical because of its country size and
population number. Prominent is that the Dutch bank size halved during The Great
Depression. Germany and Great Britain did not experience major changes regarding the factor
bank size.
Compared to Germany and The Netherlands, Great Britain had a stable banking system and it
remained stable after The Great Depression. Great Britain had no remarkable weaknesses
within their banking system. On the contrary, they had a very strong position in branching
what reduced their risk significantly. Great Britain did not suffer from the crisis like most
European countries did. This could have to do with Great Britain being financially and
economically more independent from Germany and the United states than The Netherlands
and surrounding countries were in that time. But this kind of analysis is left for future
research.
If all data was available that initially was required, the conclusions about a country‟s banking
system would be drawn with more certainty. It would give more insight in the country‟s
liquidity, solvency and banking structure regarding the period before and after The Great
Depression. By using data from both periods, changes in a country‟s banking system could be
analyzed more precisely and a complete cross-country analysis could provide more
conclusions. That gives more information about a country‟s position compared to other
Northern European countries.
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5
Conclusions
This chapter contains the main conclusions based on this research. The conclusions are
divided for the Northern European countries. Eventually, the main conclusions regarding the
cross-country analysis will be given.
5.1 Germany
Germany had an instable banking system when analyzing the factors solvency ratio,
branching and bank concentration. Germany was hit hard because of the crisis. The figures of
1934 and 1935 show that during those years, Germany had overcome the worst consequences.
It is possible that this conclusion is disguised by allied financial support. Compared to 1929
and 1930 drastic financial changes were not measurable.
5.2 The Netherlands
In contrary to most countries, The Netherlands experienced the crisis a few years later. In
1935 the health of the Dutch banking system was declining instead of improving.
Nevertheless, the liquidity ratio increased with more than 13% in 1935 while before the crisis
Dutch banks were illiquid on an average level. Besides to this illiquidity problem, the Dutch
banking system did not seem to be very instable.
5.3 Great Britain
Great Britain did not experience severe consequences because of The Great Depression. No
remarkable weaknesses are discovered within this research. Great Britain even had a very
strong position in branching what reduced their risk. Great Britain‟s strong position during the
crisis could have to do with their low dependability on economical important countries that
did suffer from the crisis, but this research does not support that statement.
5.4 Cross-country
Next to Great Britain which did not experience major changes because of the crisis, The
Netherlands held a better position before the crisis than Germany except for their liquidity
ratio which was measured below 1. In 1934 the solvency ratio of The Netherlands decreased
drastically and their average bank size halved which weakened The Netherlands significantly.
28
Without sufficient sources regarding branching and bank concentration the conclusion can be
drawn that The Netherlands held a worse position compared to Germany in 1934 and 1935.
For The Netherlands this was not the period after the crisis, but the period during the crisis.
For Great Britain a relatively low solvency ratio was measured before and after the The Great
Depression. However, the ratio did remain quite steady and it did not lead to a low point.
Furthermore, the high branching that was measured for Great Britain certainly strengthened
their position compared to The Netherlands and Germany.
29
6
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Doorne, J. (1936). Van Oss‟ Effectenboek
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de
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http://www.cbs.nl/nl-
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31