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The market for privately placed debt is served by lenders that are financial intermediaries. As such, the market is vulnerable to breakdowns, which occur when those who provide funds to the financial intermediaries are no longer willing to do so or when intermediaries become sensitive to the threat of such a withdrawal. This mechanism appears to be the main one behind the recent credit crunch for below-investment-grade borrowers.

The conditions causing the breakdown in financial intermediation at life insurance companies appear unlikely to ease significantly in the near future. With other lenders and markets unable to fully accommodate the financing needs of the medium-sized, below-investment-grade companies that are most affected, those companies may for several more years have more difficulty than usual in financing expansions.

The Current and Prospective Roles of Commercial Banks

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