Bank Entry, Competition, and the Market for Corporate Securities Underwriting

Abstract

Commercial banks have been a relatively recent entrant into the corporate securities underwriting market as a result of certain relaxations of the Glass-Steagall Act (especially Section 20 of the Act). The Congress and the academia have been debating the benefits and costs of allowing commercial banks to expand their non-bank activities, such as underwriting corporate securities. This paper contributes to this debate by investigating the competitive effect of commercial bank entry into the corporate securities underwriting market. It also compares and contrasts the effects in the debt underwriting market, where banks have obtained an increasing market share with those in the equity underwriting market, where banks have not yet made significant inroads.

A key result of the paper is we find that underwriter spreads declined significantly with bank entry (after controlling for several issue characteristics, such as debt rating, issue size, maturity, industry etc.) in the corporate debt market, consistent with the market becoming more competitive. Further, we find that the reduction in debt underwriter spreads is strongest among lower-rated and smaller debt issues, with banks underwriting a relatively larger proportion of such issues. Interestingly, we find that while Section 20 deregulation appears to have resulted in a significant decline in underwriting spreads in the corporate bond market, similar declines are not apparent in equity markets, where banks have not yet made significant inroads. Our paper also investigates other competitive aspects of bank entry, such as ex-ante yields and market concentration, and documents a pro-competitive effect of commercial bank entry into the market for corporate securities underwriting.

JEL Classification: G21, G24, N22