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Bank Finance versus Bond Finance


  • The views expressed here are personal and do not necessarily reflect those of the European Central Bank or the Eurosystem. This is a substantially revised version of a paper that previously appeared with the title “Bank Finance versus Bond Finance: What Explains the Differences between the United States and Europe?” We thank participants at the SED, ESWC, and EEA meetings, at the conferences on DSGE Models and the Financial Sector in Eltville, on Competition, Stability and Integration in European Banking in Brussels, on Policy Relevant Modeling for Central Banks in Zurich, on Macroeconomic Perspectives of Productivity Gaps in Florence, and seminar participants at the ECB, Bank of Portugal and Bocconi University. We also thank J. Chada, N. Kiyotaki, A. Schabert, and J. Suarez for their comments. This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 Economic Risk and by the RTN network MAPMU. This research has been supported by the NSF Grant SES-0922550.


We present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds and where banks are more efficient than the market in resolving informational problems. We document some major long-run differences in corporate finance between the United States and the euro area, and show that our model can explain those differences based on information availability. The model fits the data best when the euro area is characterized by lower availability of public information about corporate credit risk relative to the United States, and when European firms value more than United States firms banks’ flexibility and information acquisition role.