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Who Finances American Industry? The Relative Roles of Commercial and Investment Banking

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Abstract

In their book, Global Banking, Smith and Walter argue that there are three models of bank-industry linkages [1, p. 431]. The first is what they call the “outsider system,” which is essentially the English/American system. The typical industrial firm is semidetached from banks. Financing is done mainly through the capital markets, with short-term needs satisfied by commercial paper and longer-term needs through bonds or medium-term notes. Bank relationships are important for backstop lines, etc., but relationships remain at arm’s length.

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Notes

  1. 1.

    The Economist, Oct. 16, 2009, Vol. 401, defines keiretsu as a Japanese word meaning headless combine – a form of corporate structure in which a number of organizations link together, usually by taking small stakes in each other and, therefore, having close business relationships. It is often criticized because it implies restricting business only to members of the “family.”

  2. 2.

    The Wall Street Journal, 27 July 2010. Section C.

  3. 3.

    Information about this case in all its detail is now entirely in the public domain. See The Richmond Times Dispatch, Jan. 22, 1998, B-9, Jan 23, 1998, B-6, and Jan. 24, 1998, C-1.

  4. 4.

    The Wall Street Journal, February 3, 2011, Section C.

  5. 5.

    One quirk of reading bond tables is that the financial industry continues the maddening practice of quoting bond prices in 32nds of a point. Therefore, the ask price in this example is 108:20 or 108 20/32 = 108.625. This is 108.625 % of the face value or $10,862.50.

  6. 6.

    The Wall Street Journal, September 5, 2007, Section C.

  7. 7.

    The Wall Street Journal, July 17, 2012, p. C-2.

  8. 8.

    This graph is drawn from Fredieric Mishkin [4], p. 142.

References

  1. Smith RC, Walter I (2003) Global banking, 2nd edn. Oxford University Press, New York, p 431

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  2. Burrough B, Helyar J (1989) Barbarians at the gate: the fall of RJR-Nabisco. Harper & Row, New York

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  3. Mayer M (1993) Nightmare on Wall Street. Simon and Shuster, New York

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  4. Mishkin FS (2010) The economics of money, banking and financial markets, 9th edn. Addison-Wesley, Boston

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Wallace, W.H. (2013). Who Finances American Industry? The Relative Roles of Commercial and Investment Banking. In: The American Monetary System. Springer, Cham. https://doi.org/10.1007/978-3-319-02907-8_8

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