The Substitution of Bank for Non-Bank Corporate Finance: Evidence for the United Kingdom
43 Pages Posted: 19 Oct 2005
Date Written: September 2005
This paper investigates the extent to which changes in the quantity and cost of non-bank finance impact on the quantity and interest cost of UK-owned banks' corporate lending. The results give some support to the view that there is substitution between market finance and bank loans - loan growth rises (falls) during periods when corporate bond spreads widen (decline). In particular, bank loans seem to substitute for other forms of finance in some periods of market stress such as in 1998 Q3. Moreover, this increase in credit seems to be supplied on unchanged terms, perhaps suggesting that banks passively accommodate changes in corporate loan demand. During other episodes of disturbances in non-bank finance, such as when bond or commercial paper issuance falls sharply, banks appear to increase their loan rates, perhaps reflecting greater perceived borrower risk or some reduction in banks' own risk appetite.
Keywords: Bank and non-bank finance, substitutes and complements
JEL Classification: E51, G21, G32
Suggested Citation: Suggested Citation