Euro area corporate debt issuance during the crisis

Across the euro area the banking sector has traditionally played a key role in the provision of financial resources to the private sector. This is a distinctive feature compared with other advanced economies, such as the United States and the United Kingdom, where the role of the capital markets is more prominent as regards the financing of non-financial corporations. The banking system’s function as a financial intermediary is closely linked to its capacity for easing the asymmetrical information problems that lenders and borrowers habitually face in credit operations. Banks’ long-standing and personalised relationship with their clientele gives them access to information that is highly relevant for assessing risks and choosing and monitoring borrowers. The dispersion of investors on the markets, by contrast, makes these tasks more costly and even inviable for lenders. Academic discussion as to the pre-eminence of a model in which the role of debt markets prevails as opposed to one that is more bank-based is not conclusive. Authors such as Levine (2002) argue that it is not the importance of markets as opposed to banks that exerts a more positive influence on economic growth in the long run, but rather the extent to which the financial sector is developed; and particularly as far as their legal frameworks are concerned. However, one of the lessons of the crisis is that the euro area economy had come to depend very highly on the banking sector, which placed it in a position of great vulnerability. Langfield and Pagano (2015) consider that the source of this fragility would be banks’ high leverage and the procyclicality in credit supply, which tends to react disproportionately to changes in the level of economic activity, particularly when accompanied by wide-ranging fluctuations in asset prices. Indeed, the crisis unleashed a long and intense process of deleveraging and balance sheet re-balancing at banks, in parallel also with an overhaul of the regulatory framework at the global level aimed at bringing about a sounder and more stable banking system. These factors would have had an adverse bearing on the supply of credit during those years. In these circumstances, euro area non-financial corporations began to cover their external funding requirements more intensely with the issuance of fixed-income securities, whereas bank lending contracted. This switching of financing sources was also seen in other advanced economies and took place against a background of weak demand for financing, as a result of the adverse cyclical position, high economic uncertainty and high levels of debt built up by the private sector in the prior expansionary phase. This article analyses the process of disintermediation that has come about in the external borrowings of euro area companies during the recent crisis. An aggregate approach is adopted for non-financial corporations as a whole, though it should be noted that, in practice, corporate debt markets are not a source of financing for all these companies. In particular, SMEs depend largely on the availability of bank credit and on other sources of non-bank financing that are beyond the scope of this article, such as, for example, leasing, trade credit and other informal channels.