The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?
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The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter? Stefano Colonnello1 Received: 15 March 2019 / Revised: 26 June 2020 / Accepted: 1 July 2020 / © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract I analyze the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act’s separation between commercial and investment banking. Using a sample of US firms and their relationship banks, I show that firms curtail debt issuance and investment after positive shocks to the underwriting capacity of their main bank. This result is driven by unrated firms and is strongest immediately after a shock. These findings suggest that universal banks may pay more attention to large firms providing more underwriting opportunities while exacerbating financial constraints of opaque firms, in line with a shift to a banking model based on transactional lending. Keywords Universal banking · Relationship banking · Banking deregulation · Investment policy JEL Classification G21 · G24 · G28 · G31 · G32 · L14
1 Introduction The Great Recession has reignited the debate on the desirability of the separation between commercial and investment banking once contained in the Glass-Steagall Act of 1933. This separation was gradually removed starting in the 1980s in a deregulatory process that ended with the Financial Services Modernization Act of 1999. The deregulation was widely supported back then, in the hope of efficiency gains from information production and monitoring, and improved access to capital markets by corporations. More recently, however, these claims have been brought into question by observers, voicing concern about excessive bank bargaining power and a decline in the quality of bank-firm relationships
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10693-020-00340-x) contains supplementary material, which is available to authorized users. Stefano Colonnello
[email protected] 1
Ca’ Foscari University of Venice and Halle Institute for Economic Research (IWH), Cannaregio 873, Fondamenta San Giobbe, 30121 Venice, Italy
Journal of Financial Services Research
(e.g., Carow et al. 2011; Wilmarth 2009).1 In this context, the Volcker Rule contained in the Dodd-Frank Act of 2010 – which restricts proprietary trading and private equity activities by commercial banks – can be seen as a partial rollback of the previous deregulation (Keppo and Korte 2016). This paper focuses on one particular aspect of the deregulation of the 1980s and 1990s, namely the repeal of the Glass-Steagall Act’s provisions that limited the joint supply of private lending and underwriting services by commercial banks.2 Though the commercial banks’ entry into the underwriting market has attracted much academic interest, the evidence on the effect on firms’ access to finance is not conclusive, especially so for small and opaque borrowers (e.g., Gande et al. 1997; Shivdasani and Song 201
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