A dilution cost approach to financial intermediation and securities markets
AbstractThis paper proposes a model of financial markets and corporate finance, with asymmetric information and no taxes, where equity issues, Bank debt and Bond financing may all co-exist in equilibrium. The paper emphasizes the relationship Banking aspect of financial intermediation: firms turn to banks as a source of investment mainly because banks are good at helping them through times of financial distress. The debt restructuring service that banks may offer, however, is costly. Therefore, the firms which do not expect to be financially distressed prefer to obtain a cheaper market source of funding through bond or equity issues. This explains why bank lending and bond financing may co-exist in equilibrium. The reason why firms or banks also issue equity in our model is simply to avoid bankruptcy. Banks have the additional motive that they need to satisfy minimum capital adequacy requeriments. Several types of equilibria are possible, one of which has all the main characteristics of a "credit crunch". This multiplicity implies that the channels of monetary policy may depend on the type of equilibrium that prevails, leading sometimes to support a "credit view" and other times the classical "money view".
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 286.
Date of creation: Dec 1997
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Monetary policy; banks; financial policy; capital and ownership structure;
Other versions of this item:
- Bolton, P., 1998. "A Dilution Cost Approach to Financial Intermediation and Securities Markets," Discussion Paper, Tilburg University, Center for Economic Research 1998-40, Tilburg University, Center for Economic Research.
- Xavier Freixas & Patrick Bolton, 1998. "A Dilution Cost Approach to Financial Intermediation and Securities Markets," FMG Discussion Papers, Financial Markets Group dp305, Financial Markets Group.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- Ursel Baumann & Glenn Hoggarth & Darren Pain, 2005. "The substitution of bank for non-bank corporate finance: evidence for the United Kingdom," Bank of England working papers 274, Bank of England.
- Saoussen Ben Gamra, 2009. "Marchés obligataires et stabilité financière: L'expérience asiatique," CEPN Working Papers, HAL hal-00574161, HAL.
- A.F. Tieman, 2003.
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- A.F. Tieman, 2000. "Spillover of domestic regulation to emerging markets," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 628, Netherlands Central Bank, Research Department.
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