Banks in the 19th century had to navigate an opaque world. Accounting was not standardized, governments published less economic data, and both firms and governments were often dishonest in their reporting. Despite the challenging environment, banks had never before become more important. Commercial activity needing financing was picking up and industrial firms and middle-class households, largely ignored before, were clamoring for banks that would serve them. Crédit Lyonnais was a bank that formed in this period and it developed an unparalleled archive of data and information and a staff of analysts to help the bank navigate a risky world.
Crédit Lyonnais
In July 1863, Crédit Lyonnais was founded by Henri Germain and industrialists from Lyon and Geneva who believed that existing banks were not providing credit sufficient for their needs. This was a frequent complaint of banks levelled by industrialists in the 19th century. Crédit Lyonnais was just one bank amidst a wave of new bank formation underway in France at the time. Rather like another famous 19th century French bank, one also oriented towards industrial firms, the Pereire brothers’ Crédit Mobilier, this bank was also founded by Saint-Simonists. Saint-Simonianism was a political theory that put industrialization at the heart of several trends in European society at the time. In more than one sense, there was not anything particularly unique about the establishment of Crédit Lyonnais.
Crédit Lyonnais grew quickly though. It opened branches in Paris and Marseilles in 1864 and 1865 respectively and survived economic crises in 1866 and 1870. An international expansion began with the opening of a branch in London in 1870. It was the first outpost of what would become a large international footprint. Some of these foreign branches were charged with finding investment opportunities for the bank’s capital outside France. The country was one of the leading creditor countries of the time.
Crédit Lyonnais combined commercial banking, essentially raising deposits and making loans, with investment banking services like distributing bonds. Compared to other banks, Crédit Lyonnais served a broader swath of society, namely the growing middle classes. It catered to them by offering attractive interest rates on small deposits. With respect to its lending, after making unsuccessful longer-term investments in companies prior to 1870, the bank focused on shorter-term financing, namely discounting commercial bills, that tried and tested activity so core to banking in the 19th century.
Regardless, the bank was still active in raising long-term capital through its investment banking services. Crédit Lyonnais financed the city of Paris after the Franco-Prussian War and the Paris Commune. It became very involved in distributing bonds for foreign states and cities and also sold shares and bonds of private companies. In this business, the bank had to serve newer issuers of securities, perhaps untested ones, because it was a new firm without the established relationships that kept large creditworthy clients with its older competitors.
Still, Crédit Lyonnais grew quickly. By 1881, it had a presence in all major French towns. Around the same time, Paris became more important to the bank which moved its headquarters there from Lyon in 1882. The bank became the leading publicly traded French bank. Further, by the end of the century, Crédit Lyonnais was the largest bank in the world by the sum of its liabilities, most notably its deposits.
Accumulating Information
Unsurprising for a bank so large, the archives of Crédit Lyonnais are voluminous. Of course, all corporations generate information by the simplest of functions; examples include minutes of management and board meetings. Large companies with long histories can accumulate very large amounts of information.
Banking firms generate, and require, a particularly large amount of information, including transaction data. For each of its deals, Crédit Lyonnais preserved summaries of its internal discussions, financial evaluations, and the official terms. The bank accumulated information about other banks, which could be simultaneously competitors and partners, as well as its clients. The records include correspondence, inspection reports, personnel files, accounting files, and more.
Service des Etudes Financieres
Much of this information would have been put to use by a special division of the bank, the Service des Etudes Financieres. This group was formed in 1871 at the direction of the founder Henri Germain and was greatly expanded after 1889. It was intended to help the bank make investment decisions. This was especially important for Crédit Lyonnais because, since the new bank did not have existing relationships with the most established issuers of securities, it naturally had to take more risk in its activities. The Service des Etudes Financieres could help the bank identify the most appealing opportunities and assess their risk.
The Service des Etudes Financieres produced a daily bulletin for the bank’s management and was also tasked with producing special reports at the direction of the bank’s executive office. In addition, the group served specific bank departments including Securities Management, Risks, Interbank Relations, and Securities Issuance. It grew to hundreds of employees and was kept independent so its research would be less easily swayed by pressure from elsewhere at the firm.
The research group was divided into one team dedicated to economic research and another for industrial research. The former studied the economic and financial situation of various countries and penned reports on topics including the financial system of Britain in 1874 and the state budget of Prussia in 1898. A specific unit for studying the sovereign debt market was formed in the late 1890s. The second team was staffed with engineers and studied various industries and companies, from both a technical and financial perspective. The Service des Etudes Financieres even paid employees of other banks to spy on its behalf.
In the process of completing its work, the Service des Etudes Financieres developed an extensive archive of the annual reports of various companies together with accompanying commentary. This was maintained alongside a collection of economic periodicals from France and elsewhere; there was a growing number of such publications starting from the 1870s. This was during a period when countries were publishing more fiscal data and the introduction of telegraphy, including the laying out of telegraph cables between continents, increased the volume of information to be reviewed. No private financial organization of this period seems to have possessed an archive as large as Crédit Lyonnais, at one point amounting to 30,000 volumes and 45,000 files on countries, industries, railways, and banks.
Using Data in Banking
The information compiled by the Service des Etudes Financieres enabled Crédit Lyonnais to compare the health of firms and governments borrowing money. This was not straightforward. There were no national or international accounting standards. The researchers had to overcome differences in accounting practice; even within a country practices could differ. As a means of doing this, Crédit Lyonnais developed a standard way of measuring government incomes, expenses, debts, and assets. However, they did not produce a system of sovereign credit ratings since the research was not disseminated outside of the organization; still, simple rankings and groupings of countries by fiscal strength were prepared.
The group also developed a means of comparing private company financial performance. In practice, this consisted of deconstructing financial statements and re-stating them using a common approach. As just one example of this process, companies in capital-intensive industries would commonly remove their investment in new property or equipment from their expenses and consider these investments in new assets on the balance sheet, essentially funded from the companies’ net earnings. The result would be stronger financial statements that might mask the capital-intensiveness of the business, and the routine investments needed to keep the firm competitive.
To restate these financial statements, in its analysis, the Service des Etudes Financieres would calculate “new works in the financial year” (travaux neufs de l’exercice) or essentially what we might call capital expenditures today, and these would be charged to the company’s earnings to get a more accurate picture of its true earnings. A practical effect of this work was that the bank could more properly assess the riskiness of a new borrower and could adjust the amount of credit it extended according to changes in this riskiness.
The Service des Etudes Financieres was a rather remarkable organization for the time. This was not exactly an era known for sophisticated analysis of financial reporting. The sheer volume of information the group possessed was exceeded by no other bank. However, rather than market this data for sale, it was kept secret. Still, it would use the information it possessed to pen reports for investors and depositors, particularly its largest clients. Also, the mere existence of the Service des Etudes Financieres meant that Crédit Lyonnais was assumed to have a competitive advantage in pricing securities, allowing it to become a ‘market mood setter’ as scholar Marc Flandreau describes. The position of the bank was greatly enhanced by its information gathering and analytical capabilities.
Lesson
In the 19th century, the amount of financial information available grew considerably. The number of listed companies producing annual reports grew. Governments were borrowing more frequently on bond markets and had to release financial information to entice investors. New financial publications were also launched, many compiling their own statistics. This created a new opportunity for banks but also introduced a new competitive dynamic. Banks, like Crédit Lyonnais, with a better system for accumulating, digesting, and utilizing this information stood to gain at the expense of others.
More from the Tontine Coffee-House
Read about two other 19th century banks, Crédit Mobilier and Crédit Foncier, and the later troubles of Crédit Lyonnais. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
- Flandreau, Marc, et al. International Financial History in the Twentieth Century: System and Anarchy. Cambridge University Press, 2003.
- Nougaret, Roger. “The Crédit Lyonnais Historical Archives.” Financial History Review, vol. 2, no. 1, Apr. 1995, pp. 61–72.
- Praquin, Nicolas. “Credit Lyonnais in France (C. 1871-1918): Using Cash Flow Analysis to Assess Risk in Banking.” Accounting Historians Journal, vol. 37, no. 1, June 2010, pp. 1–28.
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Norman Clairmont