Erosion of Barriers to Entry in the Banking Industry - Evidence from the Impact of the Emerging Financial Markets on the Swiss Banking Structure 1850 - 1920

A bank in the historic context only holds as much equity as is required to absorb immediate losses or expected client withdrawels, hence reflecting pure counterparty and market risks.
In an almost closed national banking system (such as the Swiss banking system between 1850 and 1920), the endogenous probability of cash withdrawal will be neglectable as the system is, adjusted for some cash hold in the individual households is closed (Jöhr 1940). Total liquidity is thus the individual bank’s levels of liquidity at hand. In a cleared market (CLE equilibrium), it can be assumed that this level equals the amount of ri. ri is in that paper shown to be the critical variable for increased competitiveness of new entrants versus incumbents. Based on this relationship, the paper links liquidity of financial markets to the banking market structure and shows that as the financial market evolves and gets more liquid, the competiveness of the banking market increases. In parallel to the increase in competitiveness, the shift of business models in traditional banks from "Bodenkredit-Banken" to Saving and Private Banks can be observed.