VoxEU Webcast

Bonds Issuance in the Crisis: Crowding out bank loans

Conventional wisdom has it that banks play a special role in providing liquidity in bad times, while capital markets are used to fund investment in good times. Olivier Darmouni  tells Tim Phillips how, using micro-data on corporate balance sheets following the COVID-19 shock, he finds evidence that instead, the corporate bond market is central to firms' access to liquidity, crowding out bank loans even when the banking sector is healthy.  This liquidity-driven bond issuance questions the comparative advantage of banks in liquidity provision, and suggests that the V-shaped recovery of bond markets, propelled by the Federal Reserve, is unlikely to lead to a V-shaped recovery in real activity.Read the underlying paper, Crowding Out Bank Loans: Liquidity Driven Bond Issuance by Olivier Darmouni and Kerry Y. Siani, which, which appeared in issue 51 of CEPR's Covid Economics series, here.