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Trends and Cycles in Financial Intermediation

Author(s): Philip R Lane

Date published: Nov 2018

*Speech given by Philip R. Lane at the conference „Financial Disintermediation and the Future of the Banking Sector“ jointly organised by Banco de España and SUERF in Madrid, on 30 October 2018.

I welcome the invitation to speak at this conference*: the topic is well chosen, since there are many dimensions to the general theme of financial disintermediation; in turn, assessments about the future of the banking sector critically depend on these forces, together with an array of other factors such as: the dynamics of banking union in Europe; excess capacity in some banking systems; the viability of bank business models; and the management of non-performing exposures. In truth, these are not independent processes: financial disintermediation closely interacts with these other factors.

Both cyclical and structural forces are contributing to the current relative decline in the importance of banks in financial intermediation. At the cyclical level, the troubled state of many banks as a result of the global, European and national financial crises has induced larger firms to turn to bond markets to a greater extent for debt funding (Becker and Ivashina 2014). As a result, the share of bonds in total debt financing for non-financial corporates has climbed from about 8 percent in 2008 to 12 percent today. The limited lending capacity of the banking system in the wake of the crisis also prompted firms and households (albeit to a limited degree) to turn to alternative funding sources such as non-bank credit providers and new technologies such as peer-to-peer lending platforms.

In addition, the accommodative monetary strategies of the major central banks has facilitated large-scale bond issuance by corporates (both to fund investment and for financial engineering purposes) and sovereigns (especially those with major new fiscal obligations due to recession-induced deficits and/or financial sector restructuring programmes). The surge in bond issuance has featured an increas-ingly-prominent role for debtors in emerging and developing economies, which entered the crisis period with less-leveraged balance sheets and posted stronger post-crisis growth performance.

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SUERF Policy Note, Issue 48SUERF Policy Note, Issue 48

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