Seurot F. (2002) Something rotten in the state of medieval banking

Seurot, François (2002) “Les crises bancaires en Italie au Moyen Age: un essai d’applicationn de la théorie de Minsky-Kindleberberger”, paper presented at the XIX Journée d’économie monétaire et bancaire, 21p.


This paper is available online (pdf).

Following a long tradition, Minsky and Kindleberger [1996] have based their analysis of financial crises in the early modern and modern periods on their vision of credit as intrinsically unstable and thus naturally prone to crashes. Their model is based on five steps:

  1. An exogenous shock modifies the incentive system the economy is based upon.
  2. These new incentive channel credit toward a given sector and produces a localized economic boom.
  3. Euphoria leads to the overestimation of the ROI and to overtrading.
  4. Fundamentals are reconsidered and credit dries up.
  5. Torschlusspanik, or bank rush (p.1).

General instability

Following the 12th-century “commercial revolution”, a new banking system arose based on a lesser reliance on metal species as a great deal of exchange took place within the bank or between its agents (p.2). Consequently, set in the Champagne fairs, a true international capital market appeared. These establishments’ transfers were only partially covered by the amount of cash they kept in their coffers. De Roover [1974] considers that as real bank money creating credit and inflation (p.3).

This created obvious liquidity issues, so the bankers were sometimes by law given a week to come up with the deposit that had been entrusted to them (p.4). The whole system was based on the clients’ trust in the personal banker. Almost every single middle age bank went bankrupted. Since conjuncture explains very imperfectly these failures, it makes sense to assume that there was some systematic issue involved. Moreover, with the boost created by the growth of the papacy’s capital flows around Christendom, banks grew closer from one another and entire crises arose in the 14th century, while financial turmoil had usually taken down only a single establishment (p.5).

Two down, (much) more to go

It was widely recognized that a bank with an appreciable amount of assets could still go bust if it did not have enough liquidity. Public securities were liquid but their value varied greatly and could easily collapse in rough times. Even though not very liquid, urban real estate was seen as enough a safety net by depositors due to its high value. Another sign clients expected: the bankers were fully liable (p.6).

The Banco Leccacorvo arose during the booming mid-1240s in Genoa. Heavily involved with the financing of the republic, it extended its credit to the pope and the king of France (p.7). The economic turn-down of 1255 however brought a number of debtors to default or to over extension of their loans which was sufficient to bring the bank down. The Buonsignori of Siena suffered a similar fate and by 1298 they had to ask the state protection from the law suits of their clients (p.8). But too many funds were strapped up abroad, the bank finally run out of species.

Bank Death

In the first 6 years of the 1340s, all the big banks of Florence failed (p.7). Since the late 1290s, Florence had dominated European finances thanks to its control of the English wool trade, the Florentine cloth trade and even the papacy’s finance over the continent (p.10). The sums involved were enormous, and the Florentine bankers indeed to finance at the same time the early 100 Years War and the prime intercontinental trade route (p.11).

However in the early 1340s, afraid of the consequences a war between Sicily and Florence could have on their deposits, the banks’ clients from Naples rushed out of the Florentine establishments. Small banks failed first, but this finally forced the larger ones into bankruptcy. What made matter worse was the default of the Florentine state (whose debt had grown by a factor 12 since 1300; p.12).

Causes of crises

Researchers have disagreed over the ultimate cause of this generalized banking failure in Europe’s prime financial center. Carlo Cipolla has underlined the dependency of the Florentine bankers on actors from the peripheries (Naples, England) who had less issues to default. On the other hand, Edwin Hunt for the great banks default and delays even from their most important were rather common, what did change is the lower demand for English wool and Florentine cloth combined with unfavourable exchange rate (local golden florin v. silver monies used elsewhere; p.13). Finally, Frederic Lane points to the lack of diversification of the Florentine banks’ assets (i.e. loans to a few big borrowers; p.14).

However, the behaviour of the banks which invested heavily in fast communication and liquid assets accumulation shows that their main concerns were liquidity and the trust that comes with it. This allows the author to assume that the roots of the crisis are not to be found in the fundamentals of the European and Tuscan economies.  It is nonetheless remarkable that the rest of the economy in Florence and other financial establishments around Europe were barely affected by the crash of the Florentine banks, which indicates mostly local and endogenous causes to the sector (p.16).

Disclaimer: this summary is written by the contributors of the blog and not by the author of the article. Any mistake is Manuel’s fault (and he shall be punished).

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