Banking sector deregulation, bank–firm relationships and corporate leverage

Abstract

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.