Banks in Capital Markets: A Survey

Handbook of Corporate Finance, Forthcoming

58 Pages Posted: 23 May 2006

See all articles by Steven Drucker

Steven Drucker

Renaissance Technologies LLC - Meritage Group

Manju Puri

Duke University - Fuqua School of Business; NBER


Banks are an important source of funding in economies all around the world, making it vital to understand how banks directly and indirectly affect funding through capital markets. Few issues have perhaps been as controversial as the appropriate scope of bank activities and whether banks should participate directly in capital market activities, providing both lending and other services, such as underwriting. We review the arguments and theoretical models that consider the consequences of commercial banks engaging in investment banking activities, and we examine the empirical evidence on the potential for conflicts of interest, which focuses on the pricing and long run performance of debt and equity underwritten securities, both in the United States and internationally. A related topic is whether investment banks and commercial banks can co-exist as underwriters. We summarize the theoretical and empirical literature, focusing on the effect that bank lending has had on underwriter fees and the ability of banks to win underwriting mandates, as well as how investment banks have adapted to commercial bank entry into investment banking. We also consider the indirect role of commercial banks in capital markets, providing a summary of banks' ability to signal the quality of borrowers through their decisions to originate and sell loans. Finally we examine related topics, such as the effects of banks holding equity and engaging in venture capital activities, and we suggest research directions.

Suggested Citation

Drucker, Steven and Puri, Manju, Banks in Capital Markets: A Survey. Handbook of Corporate Finance, Forthcoming, Available at SSRN:

Steven Drucker

Renaissance Technologies LLC - Meritage Group

800 Third Ave
New York, NY 10022
United States

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)


1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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