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Deposit insurance and specialization in commercial bank lending
Author(s) -
Booth James R.,
Booth Lena Chua
Publication year - 2004
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2003.09.006
Subject(s) - business , loan , financial system , deposit insurance , market liquidity , restructuring , financial intermediary , interest rate , finance , monetary economics , economics
Recent literature focuses on liquidity provision as a unique service provided by financial intermediaries. In this paper, we address why commercial banks dominate the provision of these services. Liquidity provision in lending is reflected in offering loan commitments. We argue that commercial banks have a unique advantage in providing this form of liquidity. This unique advantage derives from their access to deposit insurance, and perhaps to a lesser degree, their access to the discount window of the Federal Reserve System. We empirically examine business loans offered by commercial banks, investment banks, and insurance companies. We show that commercial banks have a comparative advantage in offering loan commitments with fixed‐formula floating interest rates. Other major financial intermediaries such as investment banks favor bridge loans for corporate restructuring, and insurance companies favor longer term fixed interest rate spot loans. These results are consistent with commercial banks' unique corporate lending role (that of liquidity provision) deriving from their access to fixed‐price deposit insurance.