Abstract
Economic theory argues that developed financial systems foster economic growth by promoting efficiency in the allocation of resources to productive units. However, the evidence from the flow of funds in the last 15 years suggests that in countries with booming financial sectors innovations in intermediation activity, rather than influencing firms’ capital structure, have promoted self-referential dynamics, as the overall expansion in size has been mainly due to the surge in claims and obligations between financial firms. The evidence of the increased interconnectedness within the financial system has several implications for financial stability.
We would like to thank Antonio De Socio and Cristiana Rampazzi for precious research assistance. The opinions expressed are solely our own and do not necessarily reflect those of the Bank of Italy.
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- 1.
The indicator proposed by Levine has bank credit to the private sector as the numerator. Slightly changing the aggregate used does not, however, alter the relative position of the countries considered.
- 2.
On households see Chap. 4 by Bartiloro et al.
- 3.
Data for the US are not comparable as they do not include buyouts.
- 4.
Other intermediaries with a key role in the development of non-financial firms are those supporting them for the issuance of bonds and their subsequent placement on the market. For example, between 2000 and 2009, among the top 20 lead managers in bond placement there was just one Italian intermediary (Unicredit, ranking 18th) and only 3% of bonds placed on the euro-market were related to an Italian intermediary. The absence of intermediaries specialized in bond placement increases the cost of issuance for non-financial firms; this helps to explain the small amount of private bonds in Italy.
- 5.
On this issue see also Chap. 5 by Semeraro.
- 6.
On this issue see also Chap. 9 by Infante et al.
- 7.
Financial debt differs from total financial liabilities in that it includes only loans and securities other than shares.
- 8.
A recent study focusing on Italian non-financial firms’ bond issues shows that the differences with respect to the more developed Anglo-Saxon markets is due in large part to the underdevelopment of the stock exchange, which attracts a small number of non-financial corporations (De Socio et al. 2010). Indeed, when analysing bonds issued by listed companies (measured with respect to total financial debt) these differences almost disappear, confirming that bonds are usually issued only by listed firms because of the fixed costs of entering the financial markets. Another important determinant of small bond issues is the lack of an adequate network of institutional investors: on the supply side, the absence of specialized intermediaries for their placement may increase the cost, while on the other side, a limited range of institutional investors, which are the main buyers of this type of securities, keeps demand low.
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Bartiloro, L., di Iasio, G. (2012). Financial Sector Dynamics and Firms’ Capital Structure. In: De Bonis, R., Pozzolo, A. (eds) The Financial Systems of Industrial Countries. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-23111-7_6
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