Banking sector deregulation, bank-firm relationships and corporate leverage

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.