Bond vs Bank Finance and the Great Recession

11 Pages Posted: 30 Jul 2020

See all articles by Manuel M. F. Martins

Manuel M. F. Martins

University of Porto, cef.up, Faculdade de Economia

Fabio Verona

Bank of Finland - Research

Date Written: April 1, 2020

Abstract

The typical increase of the corporate bond-to-bank ratio during downturns is known to mitigate business cycle recessions. In the three longest and deepest post-war U.S. recessions this ratio didn't increase from their outsets. In this paper we focus on the timing of the corporate bank-to-bond substitution in the Great Recession, simulating counterfactual paths for output growth under plausible notional behaviors of the bond-to-bank ratio. We find that the Great Recession would have been milder and the recovery much stronger if the bank-to-bond substitution had started since the outset of the recession and evolved thereafter as in most U.S. recessions.

Keywords: corporate finance, bond finance, bank finance, Great Recession, business cycle

JEL Classification: E32, E44, G00

Suggested Citation

Mota Freitas Martins, Manuel and Verona, Fabio, Bond vs Bank Finance and the Great Recession (April 1, 2020). Available at SSRN: https://ssrn.com/abstract=3643293 or http://dx.doi.org/10.2139/ssrn.3643293

Manuel Mota Freitas Martins

University of Porto, cef.up, Faculdade de Economia ( email )

4200-464 Porto
Portugal

Fabio Verona (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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