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Bank and Nonbank Financial Intermediation



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    • Philip Bond is at The Wharton School, University of Pennsylvania. I thank seminar audiences at the AFE and Gerzensee, Douglas Diamond, Michael Fishman, Arvind Krishnamurthy, Philip Strahan, Robert Townsend, and especially Richard Green (editor) and an anonymous referee for some very helpful comments. I am grateful to the Institute for Advanced Study for hospitality and financial support (in conjunction with Deutsche Bank) over the academic year 2002–2003. Any remaining errors are, of course, my own.


Conglomerates, trade credit arrangements, and banks are all instances of financial intermediation. However, these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk, in whether or not intermediation is carried out by a financial specialist, in the type of projects they fund and in the type of claims they issue to investors. The paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation, and explains why they differ. Specific applications to conglomerate firms, trade credit, and banking are discussed.