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THE ECONOMICS OF THE PRIVATE MARKET

The Current and Prospective Roles of Commercial Banks

Commercial banks participate in the private placement market as issuers, buyers, and agents.  They also compete with private market lenders in providing credit. Drawing on parts 1 and 2, this section describes the current role of banks in the private placement market and speculates about their role in the future.

Banks as Agents and Brokers

U.S. commercial banks have recently been strong competitors in the market for private placement agenting services. Of the 5,550 private placements of debt appearing in the IDD database for 1989-91, U.S. commercial banks were either sole agent or co-agent for 1,944, or 35 percent. Their share of volume was 32 percent. ¹⁵⁷  Foreign banks had a 1 percent share of all volume. ¹⁵⁸ In the market for private equity agenting, U.S. banks had a 14 percent share of volume during 1990-91, whereas foreign banks had a 6 percent share. ¹⁵⁹

During 1975-77, U.S. banks had only about a 7 percent share of the total private placement agenting market (Board of Governors, 1977).  Their share has clearly grown substantially during the ensuing fifteen years.

Table 14 lists the twenty-five U.S. banks that appear as agents in the IDD database for the period 1989-91, along with the number and volume of assisted placements of both debt and equity. Two things about the list are striking. First, only ten banks accounted for 98 percent of the known volume of new issues assisted by banks.  Second, the list is relatively short when compared with the list of more than 10,000 commercial banks in the United States. The table is surely incomplete, as some banks that act as agents may not report their transactions to IDD; however, it does show that apparently only a small fraction of banks act as agents.

As a group, commercial banks do not appear to specialize in assisting types of transactions or issuers in industries that are different from those assisted by investment banks.

Regulatory restrictions may to some extent reduce banks' ability to compete in the agenting market. In particular, the few banks possessing section 20 subsidiaries with full debt and equity underwriting powers may have a competitive advantage over banks having no such powers.

14.  U.S. bank agents of private placements, 1989-91¹

1. Number of deals and volume include placements of both debt and equity.  The list of banks is surely incomplete because

1. some banks may not report agent activity to IDD, and

2. some that do report may not be identifiable as banks from the information in the IDD database.

Source.  Computations using data from IDD Information Services.

157. The amount of a co-agented issue was split equally among co-agents in computing shares of volume.

158. Any subsidiary, branch, or bank owned by a foreign bank was classified as a foreign bank agent.

159. Our database does not include private equity issued during 1989.

Why Do Banks Act as Agents, or Why Is the List of Bank Agents So Short?

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