Firm debt financing structures and the transmission of shocks in the euro area

The debt financing structure of euro area firms has broadened since the introduction of the euro. While bank loans still account for a major share of corporate debt, euro area firms have increasingly resorted to bond financing over the past decade and a half. Empirical evidence suggests that this shift in firms’ debt financing structures affects the transmission of shocks to the euro area economy. While corporate bonds and loans typically respond in a similar procyclical manner to exogenous changes in business investment, bond issuance tends to mildly cushion the credit contraction resulting from adverse supply shocks. The evidence also indicates that a higher share of bond financing strengthens the transmission of monetary policy measures that primarily operate via longer-term yields, whereas short-term rate changes tend to exert stronger real effects in economies that are more dependent on loans. From a broader perspective, the higher share of bond financing renders euro area firms more resilient against crises concentrated in the banking sector. However, this benefit may be counteracted by a rising presence of more vulnerable firms in the corporate bond market and by the structural vulnerabilities of non-bank financial intermediaries, which are significant investors in that market. JEL Classification: E44, E51, E52