Bridge over ocean
1 February 2013 CFA Institute Journal Review

Filling the Bank-Shaped Hole (Digest Summary)

  1. Nitin Joshi

New forms of corporate financing have emerged as European banks have retreated from funding corporations. The author explores the associated challenges that lie ahead.

What’s Inside?

European banks are retrenching because of shrinking domestic and foreign lending, and thus nonbank finance companies of all shapes and sizes have sprung up to cover the resulting shortfall in funding. But the evolution of nonbank finance might not be able to fill the gap left by banks.

How Is This Article Useful to Practitioners?

Corporate financing is one of the key areas of study for investment bankers, investment managers, and corporate treasurers. In Europe, banks account for the bulk of corporate financing activity. Additionally, banks in Europe — as well as in other areas around the world — are under pressure from regulators, creditors, and shareholders to refashion themselves into safer, smaller entities. As a result, they are trying to rely more heavily on deposits and are showing a preference for short-term assets, which are easier to fund and less worrisome to regulators than longer-term assets.

Many peer-to-peer platforms, asset managers, and institutional investors are moving into corporate financing as banks move out of it. Universal banks are bringing their bond and loan activities closer together. In theory, there are large pools of nonbank capital to cover the financing, and borrowers can tap capital markets to fulfill their funding needs. Unfortunately, transaction costs, liquidity, and size can be a hindrance to some firms as they seek to access capital markets. Additional impediments to a rapid surge in nonbank finance include behavioral, technical, and operational barriers; the euro crisis; and a lack of expertise in less-liquid and less-creditworthy assets. Alliances between banks and institutional investors can solve these problems: Banks originate the debt, keep a portion of it on their balance sheets, and deliver the rest of the debt to investors.

Abstractor’s Viewpoint

The author discusses the funding shortfall that has resulted from European banks’ retreating from funding and the resulting opportunities for nonbank finance firms. Peer-to-peer lending, alliances between banks and institutional investors, and securitization of debt may provide some answers to the problems. These new forms of corporate financing need proper regulation that will help investors avoid a buildup of undue risks and that will not hinder the growth of these funding avenues.

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