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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Firm Financing: Banks versus Non Banks
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Firm Financing: Banks versus Non Banks

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Olivier Darmouni, Columbia University

Credit Disintermediation and Monetary Policy

Nicolas Crouzet
,
Northwestern University

Abstract

How does monetary policy affect corporate investment? This paper argues that the answer depends on how much firms rely on intermediated debt (loans), as opposed to arm’s length debt (bonds.) I study a model in which firms choose investment and the debt mix by trading off higher loan flexibility with the lower cost of bonds. Borrowing among bank-dependent firms responds less to monetary shocks than among bond-financed firms, while investment responds more. Moreover, bank-dependent firms tend to increase their reliance on banks following a tightening. I provide firm-level evidence consistent with these predictions. I also use the model to study how monetary pass-through changes as firms become less reliant on intermediated debt, as they appear to have in the data

Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants

Rustam Abuzov
,
University of Lausanne
Christoph Herpfer
,
Emory University
Roberto Steri
,
University of Luxembourg

Abstract

We investigate the link between competition in credit markets and lax financial covenants. Using an exhaustive dataset covering the U.S. market for leveraged loans, we exploit the 2014 Interagency Clarification on Leveraged Lending as a source of plausibly exogenous reduction in regulated banks’ capacity to offer loans contracts with lax covenant protection. Borrowers that previously borrowed from regulated lenders switched to unregulated lenders, or shadow banks, as a response. This response was most pronounced for borrowers with low switching costs. As a consequence, market share of regulated banks declined by roughly 2%, or $30bn, to the advantage of the shadow banking system. Our results suggest the necessity to internalize the effects of non-price competition between the regulated and the non-regulated sectors in regulatory decision making.

Bank Credit and Market-Based Finance for Corporations: The Effects of Minibond Issuances

Steven Ongena
,
University of Zurich
Sara Pinoli
,
Bank of Italy
Paola Rossi
,
Bank of Italy
Alessandro Scopelliti
,
European Central Bank and University of Zurich

Abstract

We study the effects of the diversification of funding sources on the financing conditions for firms. We exploit a regulatory reform which took place in Italy in 2012, i.e., the introduction of “minibonds”, which opened a new market-based funding opportunity for unlisted firms. Using the Italian Credit Register, we investigate the impact of minibond issuance on bank credit conditions for issuer firms, both at the firm-bank and firm level. We compare new loans granted to issuer firms with new loans concurrently granted to similar non-issuer firms. We find that issuer firms obtain lower interest rates on bank loans of the same maturity than non-issuer firms, suggesting an improvement in their bargaining power with banks. In addition, issuer firms reduce the amount of used bank credit but increase the overall amount of available external funds, pointing to a substitution with bank credit and to a diversification of corporate funding sources. Studying their ex-post performance, we find that issuer firms expand their total assets and fixed assets, and also raise their leverage.
Discussant(s)
Jose-Luis Peydro
,
ICREA, Pompeu Fabra University, and CREI
Boris Vallee
,
Harvard Business School
Melina Papoutsi
,
European Central Bank
JEL Classifications
  • G2 - Financial Institutions and Services