Ch. 5: Banks in Capital Markets 227
Many empirical studies document that, in both debt and equity offerings, borrowers
receive lower underwriting fees when they use their lending bank as underwriter. Both
prior lending and concurrent lending increases the likelihood that the bank will win
underwriting mandates. These results seem to imply that commercial banks will crowd
out specialized investment banks. However, recent evidence suggests that investment
banks are competing with commercial banks by developing lending units. Investment
bank lending raises serious issues for regulators, yet there is limited evidence on the
consequences of investment bank lending. More research is needed in this area.
Banks also play an indirect role in capital markets. Empirical studies of stock market
reaction to loan initiations, renewals, and sales confirm that banks can signal the quality
of firms to outside investors through their lending decisions. Additional evidence sug-
gests that the existence of a bank lending relationship reduces the costs of information
acquisition for capital market participants.
Overall, there are positive effects from the interaction between commercial banks’
lending activities and the capital markets. However, banks in the U.S. are allowed to
hold equity only though restructuring bad loans or through venture capital investments.
Should commercial banks in the U.S. be allowed to expand their ability to hold equity
holdings of firms? In general, we observe that there is some evidence of efficiencies
from financial intermediaries being able to hold equity stakes. For example, when com-
mercial banks hold equity in firms through venture capital subsidiaries, they foster an
ongoing lending relationship that results in efficiencies that benefit firms through lower
loan pricing. Would there be positive effects from the interaction between commercial
banks’ equity holdings and capital markets? When banks hold equity in firms do they
provide value added services similar to those provided by venture capitalists, such as
professionalization or support in the human resources area? What can we learn from
examining the effects of commercial bank equity holding in other countries, such as
Germany and Japan? These issues are yet unresolved and promise to be at the forefront
of continued regulatory debate on the scope of bank activities.
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