Caveat Emptor: Coping with Sovereign Risk under the International Gold Standard

Marc Flandreau ()
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Marc Flandreau: Sciences Po - Sciences Po, Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES

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Abstract: This paper studies how private banks dealt with sovereign risk before World War I. At that time there was no multilateral institution to bail out borrowers in default and sovereign rating had not yet developed. All the burden of information collection and processing was borne out by individual banks. We focus on the experience of Crédit Lyonnais, which grew over the period into the largest international bank in a country that was the second largest world creditor. In 1871, Crédit Lyonnais set up a Service d'Etudes Financières (SEF), a research department whose aim was to study borrowing countries. The lending spree of the late 1880s, and the bust which ensued, provided the impetus for a massive expansion of SEF, which then developed techniques to analyse sovereign risks. We argue that these methods are an essential aspect of the market mechanism as it operated before World War I: given the prominence of Crédit Lyonnais on the international scene, its perceptions influenced the size and direction of capital flows.

Keywords: private sector risk model; rating; sovereign risk (search for similar items in EconPapers)
Date: 2022-02-25
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03588772
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03588772

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