Agent-Based Modelling of the
Emergence of the UK Banking Sector
Philip Garnett, Institute of Hazard Risk and
Resilience, Durham University
and
Simon Mollan, University of Liverpool Management
School
Introduction
Networks & Simulation for Business History
•
The vast majority of businesses leave few traces
•
•
This is especially true of the British banking sector, despite many rich
archives
We cannot know what resources, capabilities, decisions, strategies,
organizational cultures, personalities, or policies had an impact on those
organizations
Introduction
• Business history therefore has:
• a limited sample of organizations
• an archival bias toward successful survivors
• (a tendency toward?) post-hoc justifications of what makes a business
‘successful’
• (frequently) a dominant - broadly conceived - “strategic management”
view of corporate behaviour, success and failure based on analyses of
strategy, structure, ownership and performance, etc
Baker, Mae and Collins, Michael (2007), ‘Methodological
Approaches to the Study of British Banking History’, Revue
Economique, 58, 1, 59-78.
Discuss Holmes and Green’s history of the Midland Bank:
The Midland’s history is rightly presented as a success story
and a great deal of the “analysis” consists of the authors explaining
how important strategic decisions (admittedly identified in
hindsight) were made and how the bank grew in scale (whether in
terms of number of accounts, capitalisation, balance sheet, number
of offices, or number of employees (Baker and Collins, 2007: 61).
Reflecting on Ackrill and Hannah (2001) the
creation of Barclays in 1896 was strategic…
…a defensive alliance amongst twelve familyrun banks against the intensifying threat of
competition and possible take-over from the larger
joint-stock banks such as Midland and the
National Provincial (Baker and Collins, 2007: 62).
Introduction
• These are successful organizations
• Information comes from Archives
• & Corporate histories


Holmes, A.R. and Green, Edwin (1986), Midland. 150 Years
of Banking History. London: Batsford.
Ackrill, Margaret and Hannah, Les (2001), Barclays: The
Business of Banking, 1696-1996. Cambridge: Cambridge
University Press.
• They try to explain the growth and success of the banks
in terms of the banks’ own operations
• Can this be challenged?
• What about the environment that the banks existed in?
1) Collected data on the changing demography of
the UK banking sector from 1550s to the
present day.
2) Stored the data in a network database so we
can track individual banks through time.
3) Produce an agent-based simulation of the
amalgamation period.

The period of time from 1820s that shaped
the banking sector that we see today.
Relational Database
Node:
Child
and Co.
Node:
Glyin
Mills and
Co.
Relationship: Acquired
Attributes:
• Creation Date
• End Date
• …
Extending the Database:
• Client information
• Interlocking Directorships
• Debtor/Creditor relationships
Relationship:
Banks With
L1
Relationship:
Client
Node:
Some
Co.
L2
Network Database

Data is basic ‘biographical’ details – no financial data

Stores data in the form of Nodes, and Edges in a Neo4j Network Database.

Nodes are banks, they have attributes.


Bank Name.

Creation Date.
Edges store the relationship between the nodes.


Powerful method of storing data that allows the relationships between data points
to be analysed.


Merged with/Acquired by.
Network databases have a lot to offer real work complex systems research.
It is possible to 'walk' the network.

This allows us to find all the banks the came before a particular bank – the
bank’s tree of antecedents.
Changing bank population

Between 1559 & 1810 the population of UK banks grows exponentially.

Growth of ~2.7%.

Around 1810 population starts decreasing exponentially (~1.2%).

This looks very similar to ecological population collapse.

Population increase far beyond the carrying capacity of the environment until it
eventually collapses.

Mergers to form bigger banks don't have a good biological equivalent.

Banks are selected out of existence either through failure or merger/acquisition.
•
Sykes, J. (1926) The Amalgamation Movement in English Banking, 18251924. London: P.S. King and Son Ltd.
•
Prior to 1825 banks were limited in there size. For a century afterwards
amalgamations/mergers in British banking occur.
•
Is the environment that the banks are operating more important than the
individual agency of a bank and the people running that bank?
Competitive selection and the growth of banks
Growth of Bank Groups


All bank “agglomerations” seem to be growing at approximately
the same rate – as measured by the number of agglomeration
events – these are also selection events.
Hypothesis:

In a limiting environment final group size could be a combination the of point in time where
expansion started and the rate of growth.



HSBC grows (as) quickly but starts late, and therefore can never catch-up.
Suggests that all banks in the population expand by acquisition as quickly as they can.
Bank group sizes flatten out at almost exactly the same time
~1925.


No more banks left to merge with/acquire
Change in regulatory environment – bank amalgamations regulated by the Bank
Amalgamations Committee

The emergence of the cartel – the Big 5 of large banks

This is also the time at which the UK bank population stabilises
Simulation
• Can a simple agent-based simulation of
mergers, creations and failures of banks
produce the a simulated bank population that
mirrors our real data?
• Simulating the period from 1810 forward, from
the maximal bank population (1100 banks).
• Banks can (with some probability/rate):
• Fail and leave the population altogether.
• Merge with another bank.
• New banks can be created.
• Simulation timestep is one month.
“Agglomerations” Size Distribution
“Agglomerations” Size Distribution
Simulation Mergers Network
• Simulator stores results in a Network Database.
•
Resulting network structure can be compared with real
network.
•
Changes in the assumptions in the simulation change the
network structure but not the population level outputs.
•
New result, not analysed so far….
Isomorphic behaviour?
• Institutional isomorphism (DiMaggio and
Powell, 1983):
• Units in a population come to resemble each other
as a result of environmental factors
• Coercive – government, regulation
• Mimetic – imitating ‘successful’ behaviour
• Both seem present in the case of UK banks
Each of the Big Five has grown partly by amalgamation and
partly by the opening of new branches. In the latter half of the
nineteenth century local banks in the various parts of
England began to coagulate into small branch systems. The
process was continued by the merger of small branch
systems into larger branch systems, finally resulting in the
emergence of a few large banks whose head offices are in
London. (Wernette, 1935: 369).
When one bank made a bold stroke and captured a business
possessing a number of branches, its rivals were stimulated
also to seek expansion in order to protect the gains they had
made previously. (Sykes, 1926: 116)
•
Very much like the mimetic institutional isomorphism as
discussed by DiMaggio and Powell (1983)
Conclusions
•
There is a complexity to the organizational past which is
revealed by using different quantitative techniques.
•
It looks as if – as viewed from a population perspective – that
the ‘successful’ banks were created as a result of a growth
pattern which was at least in part based on mimicry as other
banks were selected out of existence (failed or merged).
•
Growth occurs in this way until this system reaches
saturation/maturity.
•
Are therefore the changes in the bank population a result of
environmentally limited emergent behaviour?
•
Although human agency is present in the system, perhaps the
environment is driving the trajectory of the population as a
whole.
Conclusions



•
We are (unfortunately?) unable to disprove our hypothesis.
The simulation/date suggests that there are random
fluctuations (noise) in the number of banks.

These could be misinterpreted by regulators.

Or blur the effect of regulation over the short term.

Regulators could attach significance to a random event and alter the
environment... post-hoc justification leads to reactive policy change, which could
have unforeseen consequences.
The natural trajectory of the system was environmentally
driven.

Limited agency of individual banks?

Regulatory change set the banks down a path which their agency could not alter?
If the year was 1870 would anyone believe this model had
predictive capacity? How would we know if it did?
The 1844 Bank Charter Act
1844
1866
It is tempting to say that we can see this and other crisis related events in the data
(1866), but they don’t shift the population from its path.
Blips might be nothing to do with the events.
Questions?
The Tipping Points Project Durham University
http://www.dur.ac.uk/ihrr/tippingpoints/
http://tippingpointsproject.org/
philip.garnett@durham.ac.uk
http://prgarnett.net
References
Ackrill, Margaret and Hannah, Les (2001), Barclays: The Business of Banking, 1696-1996.
Cambridge: Cambridge University Press.
Baker, Mae and Collins, Michael (2007), ‘Methodological Approaches to the Study of British Banking
History’, Revue Economique, 58, 1, 59-78.
Cameron, Rondo (1967), Banking in the early stages of industrialization: a study in comparative
economic history. Oxford: Oxford University Press.
Carroll, Glenn, and Hannan, Michael (2000) , The Demography of Corporations and Industries.
Princeton, NJ: Princeton U.P.
DiMaggio, Paul and Powell, Walter. (1983). ‘The Iron Cage Revisited: Institutional Isomorphism and
Collective Rationality in Organizational Fields’. American Sociological Review, 48, 147-160.
Hannan, Michael and Freeman, John. (1977) . ‘The Population Ecology of Organizations’. American
Journal of Sociology, 82, 929-964.
Holmes, A.R. and Green, Edwin (1986), Midland. 150 Years of Banking History. London: Batsford.
Steele, F.E. (1896), ‘Bank Amalgamations’, The Economic Journal 6, 24, 535-641.
Sykes, J. (1925), ‘The Effect of English Bank Amalgamations on Working Expenses and Profits, The
Economic Journal 35, 140, 583-589.
Sykes, J. (1926) The Amalgamation Movement in English Banking, 1825-1924. London: P.S. King
and Son Ltd.
Wernette, J. Philip (1935), ‘The English Banking System’, Harvard Business Review, 13, 3, 366-380.