Multiple avenues of intermediation, corporate and financial stability

Abstract

Using data from the US, UK, Japan and Canada, this paper provides evidence on the benefits to an economy from “multiple intermediation buffers”. The overall conclusion is that the existence of active securities markets alongside banks is indeed beneficial to the stability of corporate financing, both during cyclical downturns and during banking and securities market crises. The benefits are to limit volatility arising from the normal patterns of credit demand and supply that obtain over the cycle, and changes in agency costs as companies’ net worth varies. They also restrict the impact of undue limits on credit availability arising solely from weakness on the supply side, be it from liquidity crises in the securities markets or from liquidity or solvency problems among financial intermediaries. The benefit will be greater, the more comparable the size of securities market and intermediated financing, as well as the larger the proportion of companies able to access both loan and securities markets. The analysis raises a number of policy issues and research topics for further investigation.