THE ECONOMICS OF THE PRIVATE MARKET
Part 3: Special Topics
Part 3 focuses on two special topics. One is a recent credit crunch that cut off the access of most below-investment-grade companies to the private placement market. The second is the current and prospective role of commercial banks in the private placement market. Credit crunches have long been an interesting and controversial topic, partly because producing compelling evidence that a crunch occurred is often difficult. For the recent private placement credit crunch, relatively extensive evidence is available. The causes of the crunch are intertwined with the intermediated and information-intensive nature of the private market and are somewhat different from the mechanisms said to be responsible for a possible concurrent crunch in the bank loan market. The story of the private placement credit crunch sheds additional light on the economics of the private market and of financial intermediation.
The role of banks in the capital markets has changed substantially during the past twenty years: The rise of the commercial paper market and other markets is associated with a decline in the share of bank loans in all debt financings. As the bank loan and the private placement market are informationintensive and as medium-sized companies are responsible for a large share of borrowings in both markets, the two markets may be in competition, and one may come to dominate. However, we find the latter possibility unlikely. Because the focus of banks on relatively short-term lending appears to result from the maturity of their liabilities, they probably will not eclipse the private market as a source of long-term loans to informationproblematic borrowers unless the structure of their liabilities changes in a major way. Repeal of the laws governing the separation of banking and other forms of commerce seems to be only a first step in such a change. For similar reasons, traditional buyers of private placements appear unlikely to become major short-term lenders. Finally, neither commercial banks nor investment banks seem to possess a competitive advantage that would allow them to dominate the market for private placement agent services.