Banks in Capital Markets
Banks are an important source of funding in economies all around the world, making it vital to understand how banks directly and indirectly affect funding through capital markets. Few regulatory issues have been as controversial as the appropriate scope of bank activities. This chapter reviews the arguments and theoretical models that consider the consequences of commercial banks engaging in investment banking activities, and examines the empirical evidence on the potential for conflicts of interest, which focuses on the pricing and long run performance of debt and equity underwritten securities, both in the United States and internationally. It also summarizes the theoretical and empirical literature, focusing on the effect that bank lending has had on underwriter fees and the ability of banks to win underwriting mandates, as well as how investment banks have adapted to commercial bank entry into investment banking. In addition to the direct interaction between commercial banks and the capital markets, there is an indirect role of commercial banks on capital markets. Through screening and monitoring, banks gather private information about their borrowers. This chapter provides a detailed summary of banks' ability to convey quality to outsiders through signaling. Finally it examines the effects of banks holding equity and engaging in venture capital activities, and we suggest research directions. © 2007 Elsevier B.V. All rights reserved.