Do Banks Improve Financial Market Integration?

Liam Brunt and Edmund Cannon

No 36, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: Using a large panel of weekly wheat prices, we infer the annual rate of return on capital in each county in England and Wales in the period 1770-1820. Throughout this period markets were efficient in the sense that weekly returns were serially uncorrelated. We show that the interest rate differential between London and each county can be explained by the density of bank coverage in that county. The explosion in provincial banking in England and Wales during the industrial revolution significantly reduced regional differentials in interest rates. This is direct evidence that financial intermediation determines the degree of market integration.

Date: 2002-08-29
New Economics Papers: this item is included in nep-cba, nep-fin and nep-fmk
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