Euro area bond markets integrated, bank loans vary by country
A new ECB working paper finds that corporate bond markets in the euro area are as integrated as those in the US, with market finance premia showing little dependence on the issuer's country of origin. In contrast, bank loan spreads for the same firms are determined at the country level.
Integrated Bonds, Fragmented Loans
This paper is the first to simultaneously examine firms' market-based and bank-based external finance premia and investigate the behavior of corporate bond markets in the United States and the euro area, with a focus on country- and state-level heterogeneity in monetary unions.
Using a unique micro-level dataset, the study shows that market finance premia, measured with corporate bond spreads, are remarkably similar in both the euro area and the US.
The transmission of monetary policy to corporate bond rates is not differentiated by the issuer's state or country.
This contrasts sharply with bank loan spreads, which are determined at the country level for the same sample of bond-issuing firms.
The euro area corporate bond market is found to be as integrated as the US one, challenging conventional beliefs.
Deepening Euro Area Capital Markets
The findings suggest that the project to unify capital markets in the euro area has progressed further than previously believed for the corporate debt market.
While geographically unified, this market remains significantly smaller than that of the US.
The authors argue that deepening euro area capital markets to facilitate corporate bond issuance is crucial.
This would help firms become less dependent on their countries of operation for funding costs, fostering innovation and competitiveness.
The research highlights a fundamental need to understand why euro area firms do not issue more corporate debt and to explore the substitutability of bank and market finance.
CMU: Half-Done Job
This study provides a crucial empirical foundation for the Capital Markets Union debate, revealing unexpected integration in bond markets.
Yet, the stark contrast with bank lending highlights persistent fragmentation in other financial segments.
Policymakers must now address structural barriers to corporate bond issuance for euro area firms.