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Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting

  • Mark Carey
  • Mitch Post
  • Steven A. Sharpe

This paper establishes empirically that specialization in private-market corporate lending exists, adding a new dimension to the public vs. private debt distinctions now common in the literature on debt contracting and financial intermediation. Using a large database of individual loans, we compare lending by finance companies to that by banks. The evidence implies that it is intermediaries in general that are special in solving information problems, not banks in particular. But lending by the two types of institutions is not identical. Finance companies tend to serve observably riskier borrowers, especially highly leveraged borrowers, although banks and finance companies do compete across the spectrum of borrower risk. The evidence supports both regulatory and reputational explanations for this specialization and perhaps an explanation based on institutional differences in borrower monitoring and control. In passing, we shed light on various theories of debt contracting and intermediation and also present facts about finance companies, which have received little attention.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-25.

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Date of creation: 1996
Date of revision:
Handle: RePEc:fip:fedgfe:96-25
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  17. Donald G. Simonson, 1994. "Business Strategies: Bank Commercial Lending vs. Finance Company Lending," Economics Working Paper Archive wp_112, Levy Economics Institute.
  18. Charles Calomiris & Mark Carey, 1994. "Loan market competition between foreign and U.S. banks: some facts about loans and borrowers," Proceedings 38, Federal Reserve Bank of Chicago.
  19. Simon H. Kwan & Willard T. Carleton, 1995. "The role of private placement debt issues in corporate finance," Working Papers in Applied Economic Theory 95-13, Federal Reserve Bank of San Francisco.
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