Article Type: Original Article

Accepted Article
BANKING SECTOR DEREGULATION, BANK–FIRM RELATIONSHIPS

AND CORPORATE LEVERAGE

Fabio Braggion and Steven Ongena *

We study the effects of the 1971 deregulation of UK banking on firms’ financial and
investment policies. The deregulation was a turning point in the evolution of firm–bank
relationships during the twentieth century. Indeed, for more than 80 years prior to
deregulation most firms had had a relationship with only one bank: this was no longer the case
from 1971 on. Deregulation and intensifying competition in the banking sector spurred firms—
in local markets with many banks already active—to increase leverage and to invest more in
research and development. Bank debt similarly expanded while trade credit contracted.

This Draft: August 2017

∗ Corresponding author. Department of Banking and Finance, University of Zurich (UZH), Plattenstrasse 32, CH-8032 Zurich,
Switzerland; e-mail: steven.ongena@bf.uzh.ch.

We would like to thank two anonymous referees and an Associate Editor, along with Liam Brunt, Fabio Castiglionesi, Bob
DeYoung, Leslie Hannah, Phil Molyneux, Lyndon Moore, Daniel Paravisini, Morten O. Ravn (editor), Peter P. Robejsek,
Anthony Saunders, Klaus Schaeck, John Turner, participants at the following—the AEA Meetings (San Diego), the ACPR-BdF
Conference (Paris), the CESifo-Bundesbank Conference (Munich), the ESRC Seminar (Bangor), the FDIC-CFR Workshop
th
(Washington, DC), the SUERF-BoF Conference (Helsinki), the MFS Symposium (Larnaca), the 6 Summer Macro-Finance
st
Workshop (Paris), the 1 EABH Summer School in Financial and Monetary History (Madrid), SFI Research Days (Gerzensee),
rd
the 3 Financial History Workshop (Tilburg), the XX Finance Forum (Oviedo) and the European Banking History Conference
(Rotterdam), and seminar participants at the Catholic University of Milan, Erasmus University (Rotterdam), Frankfurt SFM,
the Free University of Bolzano, NUS, ULB, the universities of Bath, Maastricht, and Navarra (Pamplona), and Aarhus,
Bocconi, Oxford, Paris West and Tilburg universities for helpful comments. We thank Massimo Giuliodori, Andy Haldane
and Peter Richardson for sharing data and Dave Brooks (the English Language-Coaching Service, www.elcs.ch) for excellent
editorial assistance, and we acknowledge financial support from CAREFIN, EBC, ERC (ADG 2016-GA740272 lending,
Ongena), the FDIC-CFR, NWO (VIDI, Braggion) and TCF.

This article has been accepted for publication and undergone full peer review but has not
been through the copyediting, typesetting, pagination and proofreading process, which may
lead to differences between this version and the Version of Record. Please cite this article as
doi: 10.1111/ecoj.12569

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 We study an important event in recent UK history—that is to say, the 1971 deregulation of the
banking sector, and relate it to firms’ financing and investment decisions. The 1971 reform
Accepted Article introduced competition into the UK banking market by removing interest rate limits on both loans
and deposits, and by eliminating other cartel agreements (such as uniform opening hours and
administrative charges applied to customers) that had characterised the UK banking sector since
1948. The historical evidence suggests that this event is unlikely to have been driven by factors
related to firms’ investment demand and can therefore be considered as a shock to the supply of
bank credit to firms.

To give a sense of the significance of the reform, we first document that for more than 80 years
(since reliable data has been available) firms established a business relationship with only one bank.
However, starting in 1971 a remarkable shift took place from bilateral to multilateral relationship
banking. Indeed, about 85 per cent of UK companies in our sample were involved in a single bank
relationship between 1906 and 1970. This figure considerably declines to 72 per cent in 1976 and to
64 per cent in 1986.

In order to establish a causal relationship between the 1971 banking sector deregulation and firms’
financing, we use a difference-in-difference analysis and treat the 1971 reform as a natural
experiment. We compare the pre- and post-reform financial policies of firms located in cities where
many banks already had multiple branches with those of firms located in cities where only a few
banks had some degree of branch presence. In the former type of city, banks could start competing
immediately after the reform was introduced, while in the latter type of city this was not possible
without setting up new branches. It is important to note that, due to the long history of cartelisation
in the UK banking sector, local banking market conditions were historically inherited and did not
depend on the current level of economic activity. As a result, we are more likely to identify the true
effect of the reform on firms’ financial and investment policies.

Our analysis finds that following deregulation, firms in less concentrated local markets increased
their number of bank relationships, as well as bank debt over total debt, and leverage. They
decreased their trade credit considerably more than did firms in more concentrated local markets,
while at the same time increasing their net investment in intangible assets. A one to zero change, for
example, in the concentration index increases the number of bank relationships by one tenth, bank
debt over total debt by about ten percentage points, and debt over total assets by six percentage
points.

The effects on the number of bank relationships and the use of bank debt are stronger for firms
below median age and firms especially engaged in R & D. This suggests that the lack of competition
especially reduced access to finance for young and more innovative firms.

Our paper makes two contributions to the extant literature. First, our work contributes to the
growing literature that studies the evolution of financial phenomena during very long periods of
time.1 We place deregulation in a larger historical context and show that deregulation broke (as far
as we can look back) a secular trend in the number of firm–bank relationships.

1
E.g. Rajan and Zingales (2003), Chambers and Dimson (2009), Frydman and Saks (2010), Jordà et al. (2013),
Schularick and Taylor (2012), Philippon and Reshef (2012) and Knoll et al. (2017). Recent work by Graham et al.

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 Second, we provide singular evidence for the microeconomic link between bank deregulation, bank
competition and firms’ financing, because the event we study is the first banking reform in the
Accepted Article country in question following World War II and was especially focused on introducing competition
into the banking industry.

Unlike US banking reforms that were introduced stepwise over many years, the UK introduced most
elements of reform in a single month—that is to say, in October 1971. Both Zarutskie (2006) and
Rice and Strahan (2010), for example, study a later step in US reform: the deregulation of interstate
branching.2 While Rice and Strahan (2010) find that interstate branching reduced loan pricing but did
not increase firms’ leverage, Zarutskie (2006) finds that, following reform, young firms were less
likely to use debt. However, these results do not exclude the possibility that positive effects on loan
quantities could have been observed in the earlier stages of deregulation, when local banking
markets were even less competitive.

And unlike the 1985 French deregulation considered in Bertrand et al. (2007), the UK reform does
not involve the elimination of industrial subsidies provided by the government via the banking
sector. As a result, we can isolate the effects of bank competition on firms’ financing from the
possible effects related to the role of the government in providing credit to the economy. Bertrand
et al. (2007) find that following deregulation firms’ use of bank debt and leverage decreased, a result
that supports the notion that with the elimination of government subsidies banks became more
careful with regard to screening borrowers and granting loans.

As our main empirical strategy consists of a difference-in-difference analysis based on the banking
sector deregulation of 1971 and on the local degree of banking concentration prior to deregulation,
two additional salient points need to be clarified. First, banking deregulation led to changes in the
supply of capital conditions. The historical evidence in fact suggests that deregulation was driven by
the need of the Bank of England to have a more effective way of conducting monetary policy, rather
than by any effort to accommodate the specific needs of the corporate sector. Second, deregulation
arguably intensified banking competition most immediately in those local markets where many
banks already had a ‘bricks-and-mortar’ presence. We base this conjecture on Stigler (1964) who
states that in an area with a large number of producers (in our case, a large number of banks and
branches) cartel agreements are more difficult to enforce. The larger the number of banks in a city,
the less visible are the actions of each bank, and the lower is the probability of detecting a bank that
breaks any given cartel agreement.3

(2015) shows that US corporate leverage doubled from the 1920s to the 1970s. The authors explain this
phenomenon not only by looking at the changes that took place in taxation, but also by linking the doubling
with fundamental developments in industry composition, firms’ characteristics, assets and investments, and—
important for our paper—credit supply conditions.
2
See also e.g. Black and Strahan (2002), Stiroh and Strahan (2003), Huang (2008) and—recently—Hoffmann
and Stewen (2015) and Berger et al. (2015) on the relevance of banking deregulation for credit and real
growth, and Leary (2009), Sufi (2009), Lemmon and Roberts (2010) and Banerjee and Duflo (2014) on the
relaxation of credit supply constraints and corporate borrowing.
3
Also important for our identification strategy is the fact that the distribution of bank branches in the UK in
the late 1960s was historically determined and unlikely to depend on then current economic conditions. In
1948, the Bank of England and the Treasury promoted the introduction of cartel agreements among British

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 To conclude, we find a robust set of results suggesting that deregulation and increased competition
in the banking sector (by providing the opportunity for firms to engage with multiple banks)
Accepted Article increases the supply of bank debt and leverage in the economy. To the best of our knowledge, this is
the first paper in the academic literature that provides microeconomic evidence that links increased
competition in the banking sector to a higher number of bank relationships with higher corporate
leverage. And we believe our analysis also has important policy implications. Emerging economies
such as China have, today, a concentrated banking sector, credit controls and interest ceilings very
similar to those in place in the pre-1971 UK (Calomiris and Haber (2014), pp. 463-467). The
experience of the UK can thus provide useful guidance concerning the effects of banking
liberalisation on corporate finance and the real economy.

Section 1 provides some institutional background and introduces the data. Section 2 demonstrates
that deregulation was indeed a unique turning point during the twentieth century with regard to the
way in which corporations engaged with the banking sector. Section 3 analyses the impact of
deregulation on the number of firm–bank relationships, and on firm financing, across local banking
markets according to the concentration of bank branch presence. Section 4 analyses how the reform
led to new banks penetrating more concentrated banking markets. Section 5 concludes.

1. Institutional Background and Data Sources

1.1. Historical Background

After World War II, the UK Treasury and the Bank of England actively promoted the existence of a
cartel among the big British banks and supported the introduction of interest rate ceilings and
lending controls (we provide a more complete picture of the cartel arrangements and their demise
in Appendix A). The authorities believed that they could more effectively conduct monetary policy by
relying on a small number of large banks that acted in concert.

In the late 1960s, the government and the Bank of England recognised the inadequacy of this
arrangement. In October 1971, the cartel was dismantled and, via a set of reforms known as
‘Competition and Credit Control’, the UK authorities promoted greater competition between
financial institutions. In particular, both ceilings on interest rates and direct controls on credit were
lifted; reserve requirements were also relaxed. Such a change in policy generated strong
competition between banks and other financial intermediaries on both the deposit and loan
markets. The available historical evidence suggests that the lifting of the provisions related to the
cartel was independent from possible changes in any given firm’s demand for loans, which would
imply a form of reverse causality: deregulation happened because firms wanted to borrow more.
Reverse causality could in principle inflate the impact we estimate; however, it appears that the
cartel was lifted because:

(1) Of the inefficiencies related to the cartel itself. Like every monopoly, it led banks to waste
resources, suffer agency problems and lack dynamism and entrepreneurship.

banks. The cartel appears to have frozen local market conditions at the 1948 levels. Our own data, as well as
the history of the period, reveal that local market conditions changed little between 1948 and the late 1960s
(Pressnell (1970), p. 385; Carnevali and Hannah (1995), p. 74; Ackrill and Hannah (2001), p. 182).

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 (2) Credit controls were recognised as being an ineffective instrument of monetary policy. Credit
controls were not transparent—the market could not learn and hold monetary policymakers
Accepted Article accountable. Credit controls also did not conform to the views of the many leading monetary
economists who thought that monetary policy should be conducted by controlling a combination of
money supply and interest rates (Calomiris and Haber (2014), p. 143).

Based on this historical record, we analyse the ‘Competition and Credit Control’ reform in 1971 in
three steps. First, we assess how important a turning point this deregulation was for firm–bank
relationships, then we analyse the impact of deregulation on bank relationships and firms’ financing,
and—finally, in a third step—we consequently investigate the importance of the transition to
multiple banking for corporate financing.

1.2. Data Sources

The main data source is an annual publication known as The Stock Exchange Official Yearbook. The
Yearbook was first published in 1875 with the purpose of providing information on joint stock
limited liability companies quoted on the London Stock Exchange and it is regarded as the most
authoritative source of information on such companies.4 We collected data for all companies listed
in the Yearbook in the sections ‘Commercial and Industrial’ and ‘Iron and Steel’, as these contain the
bulk of mainstay firms throughout the period. We focus especially on these sectors as they
constitute the majority of the equity quoted on the London Stock Exchange. In 1968 for instance,
they comprised around 70 per cent of listed (non-financial firms) and 76 per cent of market
capitalisation (of non-financial firms).5 With the exception of 1896, we believe we retrieved
information for the entire population of firms quoted in London and belonging to these sectors—
that is to say, a maximum number of 3,236 firms in 1948.6

For each company, the Yearbook provides the name of the company and its location, the names of
its directors, the total amount of nominal share capital issued by the company and information
related to the company’s corporate governance arrangements, such as its voting rights. In some
cases dividend payments information is also provided. After 1948, the Yearbook also provides a

4
For the years 1896 to 1966 we retrieve our data from eight issues, in particular from those of 1896, 1906,
1916, 1920, 1924, 1934, 1938, and 1948. Starting in 1956 and until 1966 and between 1976 and 1986 we
access ten issues on a biannual basis, and between 1966 and 1976 eleven issues on an annual basis. Our
sample period ends in 1986 because by then the transition to multiple relationships (we detail later) appears
to be concluded (see the UK numbers in Ongena and Smith (2000) for example). We also do not study the so-
called ‘Big Bang’—the effects of the liberalisation of the London Stock Exchange undertaken in October 1986.
In principle, we consider this to be outside the scope of our study as it concerned principally the structure of
trading and the ownership of the London Stock Exchange rather than the bilateral relationships between firms
and banks.
5
This information can be directly retrieved from the Yearbook.
6
Before 1905, the Yearbook provides sufficient information only for a selection of firms. Usually, the largest
and the most traded firms are included. As a result, we suspect that our 1896 sample is biased towards large
and liquid companies.

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 summary of the last available balance sheet. Crucial for our study, the Yearbook also reports the
name of those banks that trade with the company.7
Accepted Article
We complement the data available in the Yearbook with the information provided by the
Cambridge/DTI Databank. The Cambridge/DTI Databank offers a wide range of accounting data for
many of the UK’s publicly quoted companies from 1948 to 1990. Like the data set we constructed
from the Stock Exchange Yearbook, the Databank provides data for firms in the commercial and
industrial as well as the iron and steel sector. It contains detailed balance sheet information,
including tangible and intangible fixed assets, earnings, long-term debt, trade credit and—very
important for our analysis—the amount of bank debt. Such information allows us to define more
precisely the firm–bank relationship, as we can observe whether the firm has an outstanding loan
with its own bank. The Cambridge DTI Databank also provides data on the number of corporate
acquisitions undertaken by firms between 1948 and 1990.

We also collect data on the location of bank branches, this from the Bankers’ Almanac. Each year,
the Bankers’ Almanac lists the locations and addresses of the branches of each bank located in the
UK. We collect this information for 1948, and at biannual bases between 1966 and 1986. Data on
population and employment in the various historical British counties are taken from Lee (1979), who
reports this information for every ten years starting in 1841. We use the values indicated for 1961.

2. Firm–Bank Relationships during the Twentieth Century

Using the aforementioned Yearbook information, we investigate the number of firm–bank
relationships throughout the twentieth century for UK firms. The upper panel in Table 1 presents the
number of firm–bank relationships since 1896 (Panel A in Figure A.1 is based on this table).
Relationships with a single bank prevail over the period 1900‒66. In these years, the average
number of banks servicing a company is around 1.2, whereas the median is 1. At least 82 per cent of
firms maintain a single bank relationship between 1906 and 1966. In 1956, the percentage of firms
with a single bank relationship stands as high as 88.5 per cent. The figure looks quite different in
1976: the percentage of firms having only one bank relationships drops to 72 per cent, whereas 17
per cent of companies have two relationships and around 11 per cent have more than two
relationships. The shares of firms having only one bank relationship further decreases to 64 per cent
in 1986, with 20 per cent of companies maintaining two relationships and around 16 per cent more
than two relationships.8

To provide more detail on the transition from bilateral to multilateral banking, Table 1 Panel B
reports the number of firm–bank relationships annually for the period 1964‒76 for 664 UK firms that

7
To be sure that the name and the number of banks indicated in the Yearbook corresponds to the actual bank
relationships maintained by the firm, we compare the information in the Yearbook with the information
provided in a random sample of firms’ balance sheets selected throughout our time period. In all cases, the
information reported by the Yearbook corresponds with the information reported by the firm in its balance
sheet.
8
These results are similar to the numbers presented in Ongena and Smith (2000) for the year 1996. The
authors investigate the number of bank relationships by sampling 138 large companies in the UK, and find that
only 23 per cent of firms in their sample maintained only a single bank relationship.

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 report their relationships during the entire transition period. This selection of firms ensures that the
average number of relationships the table reports is not affected by changes in the composition of
Accepted Article firms quoted on the stock exchange.

The results basically corroborate those shown in Panel A. The average number of relationships
increases in twelve years from 1.2 to 1.4. Between 1964 and 1970, the number of bank relationships
oscillates between 1.24 and 1.27. In 1971 the number is 1.30; in 1973, 1.34; and even higher values
are registered in the following years.

We also investigate which type of bank is added to firms’ firm–bank relationships. We distinguish
between clearing banks (mostly large, London-based banks), other British banks, and foreign banks.
Table 2 lists the number and percentage of relationship – year observations between 1966 and 1986
by the type both of relationship bank and added bank. Clearing banks account for 96 per cent of all
relationship bank – year observations (85 per cent are headquartered in London, 8 per cent in
Scotland, and 3 per cent in Ireland), while other British and foreign banks account for only 2 per cent
each.

Surprisingly given these proportions as presented in Table 2, many firms add another clearing bank
as a second bank, resulting in 62 per cent of the added bank observations. Other (secondary) British
banks account for 13 per cent; foreign banks for more than 25 per cent (of which 8 per cent
corresponds to commonwealth banks and the remainder to other foreign banks). These percentages
suggest that while many firms simply engaged another clearing bank so as to increase access to
credit, other firms ‘traded down’ to a (secondary) British bank so as to obtain a better size fit, or
engaged with a foreign bank in order to obtain better trade-related financial services.

In sum, it appears there was a fundamental shift from bilateral to multilateral banking that started in
1971, marking the deregulation that occurred then as a watershed event that we now aim to study
further.

3. The Impact of Deregulation on Bank Relationships and Firms’ Financing

3.1. Local Concentration and Competition

We now wish to identify how deregulation affected the number of firm–bank relationships and firm
financing; we will do so by employing a difference-in-differences analysis. We treat the ‘Competition
and Credit Control’ reform as a natural experiment and conjecture that the impact of deregulation
(and the ensuing credit control reforms) will be stronger in those cities where prior to deregulation
the existing local conditions would be favourable to the post-deregulation intensification of
competition. We think that such conditions are present in cities where many different banks already
had branches prior to 1971, because with a bricks-and-mortar presence banks could have started to
compete immediately after the reform was passed. Conversely, the immediate effects of
deregulation should have been milder in those cities where only one or a handful of banks were
physically present. We base our argument on the theory of oligopoly by Stigler (1964). In cities that
in 1971 already had many banks and branches, possible cartel agreements among banks were more
difficult to sustain, as with a large number of competitors it is more difficult to detect banks that
reneged on any such agreement. The reverse is true in cities with fewer banks, since each bank finds
it easier to check and monitor the actions of its competitors. Naturally, this argument does not apply

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 to the pre-1971 era, as the cartel agreement was established by nationwide regulation and did not
need to be policed locally by the banks themselves.
Accepted Article
Our argument is also based on two assumptions. First, it takes some time and effort to open a new
branch of a bank. If this were not the case and banks were actually able to quickly open new
branches, one would expect not to find any differential impact of deregulation on firms’ financing
across local markets. Cities with fewer banks prior to deregulation would, in fact, attract bank entry
and would become similar to markets that were already less concentrated. In sum, the swift opening
of bank branches would introduce a bias against finding any differential impact of deregulation.

Second, the degree of banking competition and concentration has to be exogenous to the then
present economic conditions. This was indeed the case in the UK in the late 1960s. The introduction
of the banking cartel after 1948 appears to have mostly frozen local market conditions at 1948
levels. The available historical evidence suggests that the opening of new branches between 1948
and 1971 was a rather wasteful activity and seemingly did not follow sound economic criteria
(Pressnell (1970), p. 385; Ackrill and Hannah (2001), p. 182). It appears as though banks were
opening new branches for self-serving motives (e.g. empire building) rather than in response to
changes in local economic conditions. Put differently, ‘[…] in expanding their branches, [banks were]
growth maximizers; they were not in general profit-maximizers’ (Carnevali and Hannah (1995), p.
74). This fact helps our identification strategy because, if anything, the opening of new branches
between 1948 and 1971 made our local measures of competition/concentration particularly
unrelated to then present economic conditions.

To give a sense of the persistence of local market competition before and after the reform, we
compute at the town level the Herfindahl–Hirschman Index (HHI) of banking concentration using
branch data for each UK town in 1948, 1966 and 1984. We find that in 1966, 83 per cent of UK cities
were in the same quartile of banking concentration as in 1948. This figure reveals a quite high
degree of persistence in local banking concentration in the years preceding the reform. In 1984, 60
per cent were in the same quartile as in 1966: a drop of 23 percentage points in respect of the pre-
reform period.9

We inspect the validity of our identification strategy by constructing graphs that display the annual
averages of firms’ numbers of bank relationships and leverage between 1968 and 1975.10 In Figure 1,
we differentiate between firms located in cities (excluding London) with high and low banking
concentration using the HHI measured in 1966 as well as firms located in London.11 We consider
London separately as it housed the London Stock Exchange and the Eurodollar market, and the many
foreign banks located in London were providing a large number of financing alternatives to

9
The 1984 Bankers’ Almanac does not cover as many towns as the 1948 and 1966 editions. Smaller towns with
a relatively high HHI in 1966, for example, are missing. To the extent that, after deregulation, more branches
were opened in these towns, we are underestimating the degree of persistence between 1966 and 1984.
10
Bank debt over total debt displays a similar behavior. To reduce the possibility that the result is driven by
issues related to sample composition, we consider firms that appear for at least two years both before and
after the reform.
11
We define as cities with high banking concentration those cities that have an HHI above the sample median,
and as cities with low concentration those with an HHI below the sample median.

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 corporations, which may have weakened the impact of deregulation. Figure 1 vividly shows that
while our dependent variables behave similarly across areas before the reform (i.e., there are
Accepted Article parallel trends before the reform), the number of firm–bank relationships, and leverage, start to
grow more quickly after the reform in low- as compared to high-HHI areas. We also notice that the
number of bank relationships and leverage grew in London after 1971, but not as much as it did in
low-HHI cities. This suggests that the special nature of London softened the impact of the reform for
firms located there.

3.2. Specifications
The equation we wish to estimate is

, = + + ∗ , + ∗ , + , (1)

with the firms’ fixed effects, the year fixed effects and the error term. Equation (1) captures
the idea that the effect of the 1971 deregulation should be stronger in markets that have lower
banking concentration at the beginning of the period. yit indicates (consecutively) the firm i’s
number of bank relationships, bank to total debt, leverage ratio and trade credit total debt. These
variables are intended to capture the main financial policies of a firm—that is to say, the importance
of its reliance on debt and the relative importance of bank debt vis-à-vis other forms of credit. Post is
a dummy variable that equals one for the years following 1971 and equals zero otherwise.

HHIi,1966 is defined as

ℎ (2)
, = .
∑ ℎ

Equation (2) represents the HHI of the local banking market in which firm i has its headquarters and
is calculated on the basis of the number of bank branches of all banks k locally present in 1966 (with
N the total number of banks in the country).

Controls (defined in Table 3) include, at the county level, County Population, which is the number of
people resident in the county in which the firm has its headquarters, and Employed over Total
Population of the County, which is the number of people employed divided by the total number of
people resident in the county in which the firm has its headquarters, and at the firm level, Firm Has
HQ in London (0/1), which equals one if the firm has its headquarters in London and equals zero
otherwise, Officially Listed (0/1), which equals one if the company had any class of its outstanding
shares officially listed in London and traded on the floor and equals zero otherwise, One Share - One
Vote (0/1), which equals one if the company applies the one share–one vote principal and equals
zero otherwise, Arm's Length Debt (0/1), which equals one if the company has outstanding public
debt securities and equals zero otherwise, Book Value of Assets, Age (of the company) in the sample
year, Board Size, which is the number of members of the administration board, Subsidiary (0/1),
which equals one if the company is controlled by another company and equals zero otherwise, and
Return on Equity, which is total profits divided by total capital and reserves.

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 Economic Relevancy is calculated for a change in the 1966 HHI of the Local Banking Market Where
Firm HQ Is Located from zero to one divided by the mean of the level of the dependent variable.
Accepted Article
We undertake our empirical analysis in a time window spanning from 1968 to 1974. We choose 1968
as the starting year to avoid including the 1967 devaluation of the pound in our estimation window.
In 1973 the taxation of dividends was amended and the tax bias against dividends practically
removed (Cheffins (2008), p. 325), which, ceteris paribus, should have decreased the demand for
external debt finance. As a result, we choose to close our estimation window in 1974 both to
minimise the effects of this tax reform and devaluation on our estimates and to ensure a ‘long
enough’ time series (we revisit this choice of window in robustness).

In order to correct the estimates for potential serial correlation, we follow Bertrand et al. (2004)—
that is to say, we average the dependent variable before and after deregulation, and estimate
Equation (1) in the following form:12

, − , = + , + , + . (1’)

The dependent variables are the changes between the 1968 to 1971 (pre) and 1972 to 1974 (post)
period averages of the dependent variables we have described above.13 Detailed definitions and
summary statistics for all variables appear in Table 3.14

In cities where market concentration is low, we expect banks to immediately compete vigorously,
and consequently that firms will increase their number of relationships and use more bank debt and
increase leverage. Hence, in those specifications we expect a negative sign on this main variable of
interest (i.e. we expected β to be negative). We cluster the standard errors at the city level. In
Appendix Table A.1 we also assess if the even more predetermined variable 1948 HHI of the Local
Banking Market Where Firm HQ Is Located yields comparable results. It does.

12
At this stage, it is worth observing that we also revisit all exercises (reported below) starting from the
following alternative specification:

, = + + ∗ , + , + , (1 Alt.)

which then after transformation equals

, − , = + , + ( , − , )+ . (1’ Alt.)

But the estimates from this alternative specification (which is not so conservative) are similar to those we
report below and are therefore not discussed further.
13
The parameter represents the time fixed effect in the first differenced version of Equation (1).
14
We restrict the analysis to firms that have at least one observation in both the pre- and the post- period. To
maintain consistency across specifications we also restrict the analysis on the number of bank relationships to
firms that are included in the Cambridge DTI Databank. Lifting this restriction makes the results somewhat
stronger.

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 3.3. Main Results
Estimates are in Table 4. For each of the four independent variables we estimate two representative
Accepted Article
models, including more variables and industry fixed effects in Model II (notice that the sample
shrinks somewhat as a consequence).

We find that the local degree of concentration is negatively related to number of bank relationships,
bank debt over total debt, and leverage: all this is consistent with the notion that after the 1971
reform, in areas with more banks, firms increased their reliance on bank debt and leverage.

In all cases, the estimated coefficients are not only statistically significant but also economically
relevant. Take the number of firm–bank relationships. The estimated coefficient on the 1966 HHI is
mostly unaffected by the inclusion of a varied set of firm characteristics and the 1966 HHI of the
Neighbouring Banking Markets (in Model II),15 and is estimated to equal -0.098 (in I) and -0.071 (in
II). An increase in the HHI from zero (unconcentrated) to one (monopoly) amounts to a decrease of
about 7 to 9 per cent in the probability of adding an extra bank relationship.

The same is true for the change in bank debt over total debt and for the change in total debt over
total assets. In both cases the estimated coefficients on the HHI are consistently negative and
statistically significant and amount to an effect that—in terms of economic relevancy (for HHI from
zero to one)—is equal to a decline of about 10 percentage points (45 per cent of its pre-reform
average) of the reliance on bank debt and a decline of about 6 percentage points (that is, 15 per cent
of its pre-reform average) of leverage. These figures are large and meaningful, and strongly suggest
that deregulation affected firms’ financing, especially in those locations where we would a priori
expect this to be the case—that is to say, where branches of many different banks were already
present and could start competing immediately.

For the dependent variable Change in Trade Credit over Total Debt we find that the estimated
coefficients on the HHI are positive, though not statistically significant, and amount to an impact (for
a zero to one HHI increase) corresponding to 8 to 9 per cent of its pre-shock average.

Overall, these estimates strongly suggest that deregulation immediately affected firms’ financing, as
well as the local presence of banks and the likely intensity of competition that resulted from that
presence.16

3.4. Extensions
In Table 5 we add interactions (to Model II from Table 4) of the 1966 HHI of the local banking market
with three salient firm characteristics that capture opacity—that is, Above Median Patents and
Goodwill (0/1), Below Median Book Value of Assets (0/1) and Below Median Age (0/1). While Table 5
only presents the interaction term estimates (for reasons of parsimony), the estimated equations do

15
This variable is defined as the Herfindahl–Hirschman Index of the neighbouring banking markets in which the
firm has its headquarters calculated on the basis of the number of bank branches present there in 1966. Recall
that the definitions of all variables used in the analysis appear in Table 3.
16
We also control for variables that describe the capitalisation and liquidity of the bank that originally traded
with the firm. Results remain unaltered (Appendix Table A.2).

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 include all aforementioned variables—that is to say, the 1966 HHI as well as Above Median Patents
and Goodwill (0/1), Below Median Book Value of Assets (0/1) and Below Median Age (0/1), as stand-
Accepted Article alone variables in levels.

Our results show that especially firms with above median patents and goodwill or younger firms,
when located in less concentrated markets, were more likely to add a bank and experienced more
significant changes in financial policy. Firms below the median age when moving from monopoly to
perfect competition for example would double their reliance on bank debt and increase their
leverage by 28 per cent. These results are in line with the ‘traditional’ view that banks with more
market power limit access to finance for young firms and firms engaged in R & D.

In Table 6 we assess whether deregulation not only affected both the number of banks and
corporate financial policies, but also resulted in immediate changes in firms’ investments. If
deregulation allows firms to acquire additional debt financing (as suggested by the results in Table
4), we may expect these extra resources to be used for additional investment. We check this
possibility by studying the total investment made by firms, in particular analysing two of its
components: Change in Net Investment in Tangible Assets and Change in Net Investment in
Intangible Assets. All models we estimate in Table 6 contain similar controls and fixed effects to the
similarly numbered models in Table 4.

The estimated coefficients on the HHI variables suggest that there is a consistent positive effect on
investment—that is to say, in markets that prior to deregulation had lower concentration
investment increases more. The effect is statistically significant and economically very large for
investment in intangible assets, which grows fivefold, moving from monopoly to perfect
competition.17 These results strongly suggest that deregulation helped firms to increase their
investments in goodwill and research and development.

In sum, not only corporate financial policies and the number of bank relationships but also corporate
investment is affected by deregulation. The effect is distributed along banking market concentration
in a way that is consistent with the resulting immediate intensification in the degree of competition
present.

3.5. Robustness
We run a number of robustness tests (in addition to the various model specifications and main
variable definitions that were already deployed). First, we construct a falsification test to see
whether the parallel trends assumption is satisfied. Any difference-in-difference analysis rests on the
assumption that the dependent variables of each group (in our case, firms located in different cities)
display the same trend in the periods preceding the reform.

17
Notice that the pre-shock average of net investment in intangible assets over total assets is very small:
around 0.069%. All models in Table 6 contain similar controls and fixed effects as in the similarly numbered
models in Table 4.

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 We therefore change the time span of our sample—that is to say, we study the firms between 1962
and 1968 and assume that a (fictitious) reform was passed in 1965. In Table 7 we verify whether the
Accepted Article 1966 HHI of the Local Banking Market Where Firm HQ Is Located has an impact on any of the
dependent variables of interest. As Table 7 demonstrates, the 1966 HHI has no impact on any
variable.

Our identification strategy is also designed to minimise the effects that changes in reserve
requirements (which were included in the 1971 reform) may have on our results. In principle,
variations in reserve requirements alone should not have any differential effects between
concentrated and not concentrated markets if banks are not in a position to compete. We rerun
similar analyses for two different estimation windows around 1957 and 1963, years when the UK
banking market was still operating under the cartel agreement but the reserve requirement was
raised from a minimum of 25 per cent to 30 per cent (in 1957) and then lowered to 28 per cent (in
1963). We find no effects of these changes in reserve requirements on the various debt ratios
(Appendix Table A.3).

We also assess our main findings for wider time windows—that is to say, 1966‒71 (pre) to 1972‒76
(post) and 1956‒71 (pre) to 1972‒86 (post). In the latter case, we also employ an HHI based on 1948
branch information. Albeit slightly weaker in terms of statistical significance, findings remain
qualitatively similar and economically very relevant (Appendix Table A.4).18

3.6. Interest Rate Behaviour

In this section, we examine whether the 1971 reform also had an impact on the interest rates that
banks applied to firms. We perform this analysis using a limited amount of data describing the
lending policy of the Midland Bank, a major lender throughout the whole twentieth century. The
data has been stored in the HSBC archive and comes from the internal reports that Midland
branches sent to their headquarters in London. These reports documented the yearly activities of
branches, providing information on the total amount of outstanding loans and on the total amount
of interest payments they received. The data is aggregated at a city level and available for a selection
of large/medium cities.19 To be consistent with the main analysis, we worked with the data between
1968 and 1974 (but results are the same for a longer time period).

For each year and each city, we first compute the average interest rate on lending by dividing the
total interest received by the total loans outstanding. Then we calculate the interest rate spread,
subtracting from the average interest rate the corresponding Bank of England rate. With this data in

18
We also pursue a general method of moments (GMM) Arellano and Bond (1991) estimation with two- and
three-year lags of the dependent variable as instruments for its one-year lag, which is added to Equation (1).
Our estimate on the interaction of the 1966 HHI of the Local Banking Market Where Firm HQ Is Located and a
dummy that takes the value of one after 1971 and equals zero otherwise is similar to the estimates we have
obtained so far with a quite a different econometric approach (Appendix Table A.5). And, following Angrist and
Krueger (1999) and Lemmon and Roberts (2010), we adopt a difference-in-differences analysis coupled with
propensity score matching to understand whether adding a bank to the existing set of relationship banks has
an effect on firms’ financial policies. Results are consistent with those reported here (Appendix B and Table A.6
and A.7).
19
The cities are Bristol, Exeter, Maidstone, Southampton, Leeds, Newcastle, Sheffield, York, Liverpool,
Manchester, Preston, Birmingham, Leicester, Norwich and London.

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 hand, we draw the scatter plots in Figure 2, where each point represents the interest rate spread
after the reform minus the interest spread before the reform for each city, represented on the y-
Accepted Article axis, with its own 1966-HHI (represented on the x-axis). Figure 2 Panel A shows that in the
immediate aftermath of the 1971 reform, Midland interest rate spreads fell more in cities with lower
banking concentration, a result consistent with our previous findings This is immediately apparent
when we see the positively sloped regression line. If we consider the entire time period (see Figure 2
Panel B), the spread appears to decline equally in all cities and there is little difference between
cities with low and high banking concentration.

A possible interpretation of this result is that, in the immediate aftermath of the reform, Midland
branches located in low banking concentration cities were the first to lower interest rates. By 1974,
other Midland branches followed. This interpretation appears plausible when we consider that the
interest rate sample covers a selection of medium/large sized cities where in principle banks were
already facing some form of competition and where we would expect the adjustment of interest
rates to occur more quickly. Interestingly, the cross-sectional variance of the interest rate spread
increases after deregulation. We find that the cross-sectional variance equals 0.26 per cent before
deregulation, whereas the variance increases to 0.39 per cent in 1972 and to 0.50 per cent between
1972 and 1974. This increase in dispersion is consistent with the idea that deregulation—by
removing interest rate controls—allowed banks to freely set their interest rates.

4. Banks Penetrating New Markets and Opening New Branches

The results in Table 4 show that the 1971 deregulation led firms to have more bank relationships,
and use more bank debt and leverage. While these effects are measured in the short run and relate
to firms’ financial policies, we can expect that deregulation may have additional effects in the longer
run. In particular, increased competition may lead banks to expand their presence and open new
branches in areas where the intensity of competition was lower at the time the reform was
introduced. In this section, we consider this possibility. For four years (i.e. 1948, 1958, 1966 and
1984), we have data on the number of banks and branches located in each UK town and city. Using
this information, we relate the extent of banking competition in a city, again measured with an HHI
of banking sector concentration, to the subsequent openings of new branches and the market
penetration of new banks. In particular, we estimate the following equation:
∆ ,( , ) = + , + , + , , (3)

where ∆ ,( , ) denotes the change in the total number of banks or branches in city i between
year t and year t+j, , indicates the HHI of industry concentration as defined in Equation (2) and
, is a dummy variable that takes the value one if the city is London and zero otherwise.20
In the analysis, we distinguish whether the relationship between local competition and entry is
different in the pre- and post-reform periods. We report the results in Table 8 (in Appendix Table A.8
we provide summary statistics). Models I and II deal with the period before the reform and show a
positive correlation between banking concentration in 1948 (1958) and the opening of new branches

20
Unfortunately, we do not have any data on city populations or economic activity that would allow us to
include additional controls.

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 between 1948 and 1958 (1958 and 1966). The coefficients are not statistically significant and their
magnitudes are small. Model III examines the post-reform period and reveals that cities that had
Accepted Article high banking concentration in 1966 also experienced strong market penetration of new banks
between 1966 and 1984. The coefficient on the HHI is positive and statistically significant at the 1
per cent level. The economic significance is also important: moving from monopoly to perfect
competition explains around 30 per cent of the standard deviation of the dependent variable.

Regarding the opening of new branches, Models IV and V show that cities with high banking
concentration in 1948 (1958) experienced a decline in their numbers of bank branches, statistically
significant at the 1 per cent level. In particular, a move from monopoly to perfect competition in
1948 would have explained around 50 per cent of the standard deviation of the dependent variable.
While we find no opening of new branches in the pre-reform period, the decline in the numbers of
branches in cities with high HHI is consistent with the notion that existing banks, more than anything
else, moved branches between cities.21 Model VI reveals a positive correlation between cities’ HHI in
1966 and the opening of new branches between 1966 and 1984: moving from monopoly to perfect
competition explains around 20 per cent of the standard deviation of the dependent variable. All in
all, after the 1971 reform, cities with high banking concentration experienced an increased presence
of new banks and new branches. This result is consistent with the notions that banks also responded
to the new competitive environment by opening new offices and by enlarging their geographical
presence.

5. Conclusion
In this paper, we document that banking deregulation and the consequent intensifying competition
may be one of the factors that explains the increase in corporate leverage observed in the UK and,
potentially, throughout the rest of the world during the twentieth century. Based on how the
relationships between firms and banks evolved during the twentieth century in Britain, we first show
that the 1971 deregulation indeed entailed a remarkable shift from bilateral to multilateral
relationship banking during this period. Then we document that bank and total debt increased more
after banking deregulation for firms located in banking markets with more intense pre-existing
competition, and for firms that added a banking relationship compared to those that did not.

CentER - Tilburg University

University of Zurich, SFI, KU Leuven, and CEPR

Additional supporting information may be found online in:

Appendix A. UK Banking in the Twentieth Century.

Appendix B. Multiple Banking, Corporate Financing and Performance.

21
Despite this observed reduction, there exists a high intertemporal correlation between all pre-1971 HHIs.

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 Appendix References.
Accepted Article Appendix Figures and Tables.

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Accepted Article Table 1
Number of Firm-Bank Relationships Throughout the 20th Century by UK Firms
% Firms with N Bank
Number of Bank Relationships Relationships
Year Observations Average Median Maximum N=1 N=2 N>2
Entire Sample
1896 678 1.15 1 4 86.9 11.7 1.5
1906 1,792 1.22 1 5 83.4 12.9 3.7
1916 1,815 1.22 1 6 83.8 12.2 4.1
1920 1,908 1.22 1 8 83.4 12.6 3.9
1924 2,140 1.23 1 6 84.1 11.3 4.6
1934 2,432 1.24 1 7 82.9 12.6 4.4
1938 2,879 1.19 1 7 86.3 10.3 3.4
1948 3,234 1.19 1 7 86.9 9.7 3.4
1956 3,164 1.16 1 9 88.5 8.5 3.0
1958 3,187 1.16 1 4 86.2 10.7 3.1
1960 3,123 1.17 1 7 87.4 8.9 3.7
1962 3,026 1.19 1 9 86.5 9.7 3.8
1964 2,935 1.20 1 9 85.9 10.4 3.6
1966 2,991 1.22 1 9 85.5 10.2 4.3
1967 2,242 1.24 1 8 84.7 10.6 4.7
1968 2,818 1.23 1 9 85.3 10.3 4.4
1969 2,745 1.25 1 9 83.5 11.7 4.8
1970 2,157 1.26 1 7 82.1 12.5 5.5
1971 2,461 1.33 1 10 78.3 14.5 7.2
1972 2,371 1.35 1 12 77.1 15.4 7.5
1973 2,221 1.41 1 8 74.2 16.9 8.9
1974 2,154 1.43 1 10 72.9 17.3 9.8
1975 1,982 1.48 1 10 71.3 18.2 10.5
1976 1,975 1.48 1 11 72.1 16.9 11.1
1978 1,766 1.56 1 11 68.9 18.4 12.7
1980 1,694 1.60 1 8 66.5 19.1 14.3
1982 1,824 1.63 1 11 66.3 18.4 15.3
1984 1,834 1.67 1 10 64.5 19.6 16.0
1986 1,834 1.66 1 19 64.3 20.3 15.4

Firms Followed from 1964 until 1976

1964 664 1.24 1 6 84.2 11.1 4.7
1966 664 1.26 1 8 83.7 10.7 5.6
1967 664 1.26 1 8 83.7 10.4 5.9
1968 664 1.25 1 8 84.9 9.3 5.7
1969 664 1.27 1 7 83.4 11.0 5.6
1970 664 1.27 1 7 81.8 13.6 4.6
1971 664 1.30 1 7 79.7 13.9 6.5

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 1972 664 1.30 1 6 79.2 13.7 7.1
1973 664 1.34 1 6 77.9 14.5 7.7
Accepted Article 1974 664 1.35 1 8 77.7 14.2 8.1
1975 664 1.39 1 8 75.3 16.1 8.6
1976 664 1.39 1 9 75.6 16.6 7.8
Notes. The table reports the number of firm-bank relationships during the 20th century by UK Firms.
For each year the upper panel reports the number of observations, the average, median and maximum
number of firm-bank relationships, and the percentage of sample firms that report one, two or more
than two relationships. The lower panel reports the same statistics for 664 firms that can be followed
from 1964 to 1976 (also plotted in Figure A.1). In 1896 only data for a selection of the largest listed
firms was reported.

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Accepted Article Table 3
Variable Definitions and Summary Statistics
Variable Name Unit Variable Definition Number of Obs. Mean Median St. Dev
Dependent Variables
Number of Firm-Bank Relationships - Average number of bank relationships between 1972 and 1974, minus average number of bank 8,779 1.157 1.000 0.531
relationships between 1968 and 1971
Bank Debt over Total Debt - Average bank overdrafts and loans divided by total debt between 1972 and 1974, minus average 5,211 0.204 0.182 0.177
bank overdrafts and loans between 1968 and 1971
Total Debt over Total Assets - Average total debt divided by total book value of assets between 1972 and 1974, minus average 5,211 0.411 0.414 0.176
total debt divided by total book value of assets between 1968 and 1971
Trade Credit over Total Debt - Average trade and other credit divided by total debt between 1972 and 1974, minus average trade 5,211 0.662 0.641 0.221
and other credit divided by total debt between 1968 and 1971
Net Investment in Tangible Assets - Average net investment in tangible assets divided by the book value of assets at the beginning of the
year between 1972 and 1974, minus average net investment in tangible assets divided by the book 5,035 0.050 0.039 0.069
value of assets at the beginning of the year between 1968 and 1971

Net Investment in Intangible Assets - Average net investment in intangible assets divided by the book value of assets at the beginning of
the year between 1972 and 1974, minus average net investment in intangible assets divided by the 5,035 0.001 - 0.008
book value of assets at the beginning of the year between 1968 and 1971
Independent Variables
1966 HHI of the Local Banking Market Where Firm HQ Is Located 0 to 1 The Herfindahl-Hirschman Index of the local banking market where the firm has its headquarters 1,203 0.186 0.167 0.129
calculated on the basis of the number of bank branches present there in 1966
1948 HHI of the Local Banking Market Where Firm HQ Is Located 0 to 1 The Herfindahl-Hirschman Index of the local banking market where the firm has its headquarters 1,160 0.193 0.167 0.105
calculated on the basis of the number of bank branches present there in 1948
1966 HHI of Neighbouring Banking Markets Where Firm HQ Is Located 0 to 1 The Herfindahl-Hirschman Index of the neighbouring banking markets where the firm has its 1,192 0.188 0.198 0.041
headquarters calculated on the basis of the number of bank branches present there in 1966
County Population - The number of people present in the county where the firm has its headquarters 8,823 2,120,449 1,674,406 1,303,708
Employed over Total Population in the County - The number of employed divided by the total number of people present in the county where the firm 8,823 0.628 0.477 0.282
has its headquarters
Firm Has HQ in London (0/1) 0/1 =1 if the firm has its headquarter in London, =0 otherwise 8,823 0.280 - 0.449
Officially Listed (0/1) 0/1 =1 if the company had any class of its outstanding shares officially listed in London and traded on 5,065 0.841 1.000 0.366
the floor, =0 otherwise
One Share - One Vote (0/1) 0/1 =1 if the company applies the one share - one vote principal, =0 otherwise 4,819 0.463 - 0.499
Arm's Length Debt (0/1) 0/1 =1 if the company has outstanding public debt securities, =0 otherwise 5,059 0.513 1.000 0.500
Book Value of Assets ('000 of £) Firm book value of assets 5,211 26,126 6,379 79,805
Age years Age of the company in the sample year 8,823 68.258 69.000 33.324
Board Size - Number of members in the administration board 5,008 6.412 6.000 2.524
Subsidiary (0/1) 0/1 =1 if the company is controlled by another company, =0 otherwise 8,791 0.088 - 0.283
Return on Equity - Total profits divided by total capital and reserves 5,211 0.796 0.640 0.818
Notes . The table reports the definitions and descriptive statistics of the dependent and independent variables employed in the ensuing analysis is based. All variables are collected from the Cambridge DTI database. We compute the descriptive statistics on the
full sample of firms between 1968 and 1974 before taking the averages of the variables before and after the 1971 reform.

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Accepted Article
Table 4
The Change in the Number of Firm-Bank Relationships, Bank Debt over Total Debt, Total Debt over Total Assets, and Trade Credit over Total Debt from 1968-1971 (Pre) to 1972-1974 (Post)

Change in the Number of Firm- Change in Bank Debt over Change in Total Debt over Change in Trade Credit over
Bank Relationships Total Debt Total Assets Total Debt
I II I II I II I II
1966 HHI of the Local Banking Market Where Firm HQ Is Located -0.100*** -0.075* -0.098** -0.096** -0.054** -0.064** 0.059 0.061
(0.029) (0.044) (0.047) (0.046) (0.023) (0.026) (0.036) (0.040)
1966 HHI of Neighbouring Banking Markets Where Firm HQ Is Located 0.346 0.276 0.178* -0.306*
(0.477) (0.187) (0.103) (0.167)
County/Location Controls Yes Yes Yes Yes Yes Yes Yes Yes
Firm Controls No Yes No Yes No Yes No Yes
Industry Fixed Effects No Yes No Yes No Yes No Yes
R-squared 0.002 0.042 0.007 0.062 0.013 0.116 0.012 0.092
Number of Observations 1,312 970 684 648 684 648 684 648
Economic Relevancy -9.1% -6.8% -47.1% -46.1% -13.7% -16.2% 8.9% 9.2%
Notes . The estimates in this table come from ordinary least squares models. All variables are defined in Table 3. The estimated coefficients are listed in the first row, standard errors that are clustered at the town level are
reported in the second row between brackets, and the corresponding significance levels are in the first row adjacent to the estimated coefficients. County/Location Controls include ln(County Population), Employed Over
Total Population in the County, and Firm Has HQ in London (0/1), while Firm Controls include Officially Listed (0/1), One Share - One Vote (0/1), Arm's Length Debt (0/1), ln(Book Value of Assets), ln(1 + Age), ln(1 +
Board Size), Subsidiary (0/1), and Return on Equity. The Economic Relevancy is calculated for a change in the 1966 HHI of the Local Banking Market Where Firm HQ Is Located from zero to one to be divided by the
mean of the level of the dependent variable. *** Significant at 1%, ** significant at 5%, * significant at 10%.

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Accepted Article
Table 5
The Change in Firm Financing from 1968-1971 (Pre) to 1972-1974 for the 1966 HHI Interacted with Firm Characteristics
Change in the Number of Firm- Change in Bank Debt over Total Change in Total Debt over Total Change in Trade Credit over
Interactions of Bank Relationships Debt Assets Total Debt
1966 HHI of the Local Banking Market Where Firm HQ Is Located I II III I II III I II III I II III
* Above Median Patents and Goodwill (0/1) -0.280** -0.150** 0.073 0.062
(0.136) (0.072) (0.045) (0.069)
* Below Median Book Value of Assets (0/1) -0.012 -0.114* -0.073 0.216***
(0.176) (0.068) (0.085) (0.070)
* Below Median Age (0/1) -0.063 -0.186** -0.095* 0.137**
(0.141) (0.075) (0.053) (0.058)
All Controls of Model II in Table 4 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
R-squared 0.068 0.066 0.066 0.066 0.071 0.069 0.119 0.121 0.119 0.098 0.099 0.095
Number of Observations 648 648 648 649 649 649 649 649 649 649 649 649
Economic Relevancy -23.5% -14.4% -18.1% -67.9% -82.4% -101.0% -12.7% -28.5% -31.1% 13.2% 31.0% 21.8%
Notes . The estimates in this table come from ordinary least squares models that are similar to Model II in Table 4, except for the variable featured in the interaction that replaces the continuous
equivalent variable in the case of Patents and Goodwill, Book Value of Assets and Age (hence note that 1966 HHI as well as Above Median Patents and Goodwill (0/1), Below Median Book Value of
Assets (0/1), and Below Median Age (0/1) are included as stand-alone variables). All variables are defined in Table 3. The estimated coefficients are listed in the first row, standard errors that are
clustered at the town level are reported in the second row between brackets, and the corresponding significance levels are in the first row adjacent to the estimated coefficients. The Economic Relevancy
is calculated as the sum of the change in the 1966 HHI of the Local Banking Market Where Firm HQ Is Located from zero to one and the interacted variable divided by the average of the dependent
variable. *** Significant at 1%, ** significant at 5%, * significant at 10%.

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Accepted Article
Table 6
The Change in Net Investment, Net Investment in Tangible Assets, and Net Investment in Intangible Assets from 1968-1971 (Pre) to 1972-1974 (Post)

Change in Net Investment in Change in Net Investment in

Change in Net Investment Tangible Assets Intangible Assets
I II I II I II
1966 HHI of the Local Banking Market Where Firm HQ Is Located -0.022 -0.024 -0.018 -0.020 -0.004** -0.004*
(0.018) (0.022) (0.017) (0.021) (0.002) (0.002)
1966 HHI of Neighbouring Banking Markets Where Firm HQ Is Located -0.114 -0.114 -0.000
(0.119) (0.122) (0.007)
County/Location Controls Yes Yes Yes Yes Yes Yes
Firm Controls No Yes No Yes No Yes
Industry Fixed Effects No Yes No Yes No Yes
R-squared 0.001 0.058 0.001 0.054 0.006 0.046
Number of Observations 668 633 668 633 668 633
Economic Relevancy -48.4% -53.5% -40.5% -44.9% -553.4% -596.9%
Notes . The estimates in this table come from ordinary least squares models. All variables are defined in Table 3. The estimated coefficients are listed in the first row, standard errors that are clustered
at the town level are reported in the second row between brackets, and the corresponding significance levels are in the first row adjacent to the estimated coefficients. County/Location Controls
include ln(County Population), Employed Over Total Population in the County, and Firm Has HQ in London (0/1), while Firm Controls include Officially Listed (0/1), One Share - One Vote (0/1),
Arm's Length Debt (0/1), ln(Book Value of Assets), ln(1 + Age), ln(1 + Board Size), Subsidiary (0/1), and Return on Equity. The Economic Relevancy is calculated for a change in the 1966 HHI of
the Local Banking Market Where Firm HQ Is Located from zero to one times the estimated coefficient on this variable divided by the mean of the dependent variable. *** Significant at 1%, **
significant at 5%, * significant at 10%.

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Accepted Article
Table 7
Falsification Test Around a Fictitious Refrom in 1965: The Change in Firm Financing and Performance from 1962-1965 (pre) to 1966-1968 (Post)

Change in the Number of Change in Bank Debt over Change in Total Debt over Change in Trade Credit
Firm-Bank Relationships Total Debt Total Assets over Total Debt
Model I II I II I II I II
1966 HHI of the Local Banking Market Where Firm HQ Is Located -0.045 0.001 0.017 0.007 -0.002 -0.007 -0.007 -0.006
(0.063) (0.034) (0.024) (0.027) (0.017) (0.018) (0.037) (0.039)
All Controls of Equivalent Model in Table 3 Yes Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects No Yes No Yes No Yes No Yes
R-squared 0.007 0.054 0.006 0.055 0.001 0.070 0.009 0.055
Number of Observations 1,684 1,254 1,215 1,169 1,215 1,169 1,215 1,169
Notes . The estimates in this table come from ordinary least squares models that are equivalent to Models I and II in Table 4. All variables are defined in Table 3. The estimated coefficients are
listed in the first row, standard errors that are clustered at the town level are reported in the second row between brackets, and the corresponding significance levels are in the first row adjacent to
the estimated coefficients. *** Significant at 1%, ** significant at 5%, * significant at 10%.

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Accepted Article
Table 8
Change in the Number of Banks and Branches
Change in the Number of Banks Change in the Number of Branches
1948-1958 1958-1966 1966-1984 1948-1958 1958-1966 1966-1984
I II III IV V VI

1948 HHI of the Local Banking Market Where Firm HQ Is Located 0.032 -2.804***
(0.035) (0.111)
1958 HHI of the Local Banking Market Where Firm HQ Is Located 0.036 -0.756***
(0.040) (0.072)
1966 HHI of the Local Banking Market Where Firm HQ Is Located 1.214*** 0.279***
(0.067) (0.097)
R-squared 0.038 0.125 0.942 0.211 0.051 0.014
Number of Observations 3,429 3,232 2,522 3,429 3,232 2,522
Economic Relevancy 5.2% 4.8% 28.1% -50.1% -17.1% 18.5%
Notes. The estimates in this table come from ordinary least squares models. The dependent variables are the change in the number of banks or branches in the local banking market where the firm
headquarters is located. All specifications include Firm Has HQ in London (0/1) a dummy variable that equals one if the firm has its headquarters in London, and equals zero otherwise. All other
variables are defined in Table 3. The estimated coefficients are listed in the first row, standard errors are reported in the second row between brackets, and the corresponding significance levels are in the
first row adjacent to the estimated coefficients. *** Significant at 1%, ** significant at 5%, * significant at 10%.
 Fig. 1
Accepted Article Assessing the Parallel Trends Assumption

Number of Bank Relationships

1.3
1.25
1.2
1.15
1.1
1.05

1968 1970 1972 1974 1976

Low HHI High HHI London

Leverage
.5
.45
.4
.35
.3

1968 1970 1972 1974 1976

Low HHI High HHI London

Notes. This figure plots the average number of firm-bank relationships and total debt over total assets
for firms located in cities with a low versus high HHI, and in London. Cities with low HHI are
defined as cities where the Herfindhal-Hirschman Index of banking concentration measured in 1966 is
below the sample median. Cities with High HHI are cities where the Herfindhal-Hirschman index of
banking concentration measured in 1966 is equal or above the sample median.

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 Fig. 2
Accepted Article Interest Rate Spreads
Panel A 1968-1972
-.022
-.024
-.026
-.028
-.03

.14 .16 .18 .2

Banks' Herfindhal index in 1966
Pa
Interest Rate Spread Fitted values

Panel B 1968-1974
0
-.005
-.01
-.015
-.02
-.025

.14 .16 .18 .2

Banks' Herfindhal index in 1966

Interest Rate Spread Fitted values

Notes. Each point on the figure represents the interest rate spread after the reform minus the interest
spread before the reform for each city, represented on the y-axis with its own 1966-Herfindhal-
Hirschman index (represented on the x-axis), for the periods 1968-1972 and 1968-1974, respectively.

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