Financial Innovation, Regulation and Crises: A Historical View
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Petram demonstrates how the Court of Holland effectively built the world’s first securities law. This legal framework also included regulatory aspects, for instance through the prohibition of short-selling in 1610. What is interesting to see is that the gradual clarification of this legal framework also influenced private enforcement mechanisms on the secondary and sub-markets. Such mechanisms typically included some form of self-regulation, for instance through peer pressure or through trading clubs submitting voluntarily to adjudication in case of disputes. In short, the successful emergence of a secondary market for VOC shares and the legal framework that was created around it resulted in a relatively stable system of shares trading that enabled the VOC to meet its high capital requirements and thrive. As such it became a model to be copied. Joke Mooij (Chapter 3) offers another story of successful financial innovation in the Netherlands, but in a very different time period and context. The creation of a network of co-operative agricultural banks in the Netherlands during the early twentieth century not only facilitated access to credit and financial services for small-scale farmers, but also made the individual, small-scale banking institutions themselves more resilient in the face of adverse conditions. This was, Mooij argues, largely because of an idiosyncratic business model, characterized by an intimate knowledge of the customer base and a built-in, high degree of mutual solidarity, whereby the network took responsibility for the individual members whenever they got into trouble. In exchange for this solidarity, a relatively high degree of centralization, strong internal safeguards and an embryonic form of prudential supervision were accepted by the participating banks from early on. These factors allowed the co-operative agricultural banking sector in the Netherlands to get through the Great Depression without any significant bankruptcies and with its market share largely intact. However, such an outcome was not a given: in Belgium, where the co-operative banking sector operated on a similar model, its evolution during the 1920s and 1930s was, by contrast, disastrous, before making a remarkable come-back after the Second World War.15 In other words, institutional robustness is no absolute guarantee, and particular circumstances, short-term business decisions and investment practices matter a lot. Nevertheless, the Dutch case, as analysed by Mooij, provides a good example of an institutional innovation that has been successful in reducing risk. Institutional innovation may have been helpful in mitigating risks in times of crisis in the case of the Dutch co-operative banks, but Tobias Straumann highlights other, less orthodox, strategies of risk management (Chapter 4). Straumann is puzzled by the fact that Swiss Re, one of the world’s leading reinsurance companies, got through the Great Depression of the 1930s seemingly unscathed. Did Swiss Re owe this outcome to a far-sighted management taking timely action to counteract the fall-out from the crisis? Or was it thanks to the implementation of a timely strategic re-orientation of the company’s business model? Based on a thorough analysis of the unpublished records of Swiss Re,
