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The economics of private placements : middle-market corporate finance, life insurance companies, and a credit crunch

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  • Stephen D. Prowse
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    Abstract

    In this article, Stephen Prowse examines the private placement market. Like the bank loan market, this market is information-intensive: parties negotiate lending terms, lenders evaluate and monitor borrowers' credit risk, covenants are used to control risk, and borrowers lack access to public debt markets. There are also differences from the bank loan market : debt instruments are securities, not loans; maturities are longer; interest rates are fixed, not floating; and the principal investors are life insurance companies not banks. The article provides evidence on the credit crunch that occurred in the below-investment-grade sector of this market in the early 1990s and that apparently continues to this day. Asset-quality problems in 1990 and 1991 focused regulatory, stock market, media, and policyholder attention on the financial solvency of insurers, who withdrew from this sector of the market. The article also examines reasons for the persistence of the crunch.

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    File URL: http://www.dallasfed.org/assets/documents/research/er/1997/er9703b.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1997)
    Issue (Month): Q III ()
    Pages: 12-24

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    Handle: RePEc:fip:fedder:y:1997:i:qiii:p:12-24

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    Related research

    Keywords: Bank loans ; Interest rates ; Credit;

    References

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    1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    3. Robert T. Clair & Paula Tucker, 1993. "Six causes of the credit crunch," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Sep, pages 1-19.
    4. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    5. DeAngelo, Harry & DeAngelo, Linda & Gilson, Stuart C., 1994. "The collapse of First Executive Corporation junk bonds, adverse publicity, and the 'run on the bank' phenomenon," Journal of Financial Economics, Elsevier, vol. 36(3), pages 287-336, December.
    6. Mark Carey S. & Stephen Prowse & John Rea & Gregory Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
    7. Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
    8. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
    9. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
    10. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
    11. Brinkmann, Emile J & Horvitz, Paul M, 1995. "Risk-Based Capital Standards and the Credit Crunch," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 848-63, August.
    12. Richard Cantor & John Wenninger, 1993. "Perspective on the credit slowdown," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 3-36.
    13. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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