Cyclicality of Credit Supply: Firm Level Evidence

Bank lending falls in economic recessions. In particular, it shrank considerably during the recent economic downturn. Does such cyclicality of bank lending reflect a decline in banks' willingness to lend (the "loan supply" effect) or reduced demand for loans from firms (the "loan demand" effect)? The considerable attention that is given to banks' financial health by the Federal Reserve, Congress, and other branches of government is only warranted if the answer is supply.

Focusing on U.S. firms that raised new debt financing between 1990 and 2009, HBS professors Bo Becker and Victoria Ivashina demonstrate that many large U.S. firms turn to the bond market when banks are in poor financial health. When times are better, the same firms get bank loans. Becker and Ivashina argue that the substitution between bonds and loans at the firm-level is a good economic proxy for the bank credit supply.

"An Unfair Advantage"? Combining Banking with Private Equity Investing

Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns? Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers? INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers.