The role of bank lending tightening on corporate bond issuance in the eurozone

• We empirically test the role of bank lending tightening on corporate bond issuance.
• We utilize the ECB Bank Lending Survey as proxy for “pure” credit supply.
• We find that tightened credit standards positively affect the corporate bond issuance.
• The effect is net of bank loan demand and robust to price differentials.
• Impact of tightened credit standards is particularly observable in core countries.

The availability of bank lending and corporate bond markets underwent a drastic change in the eurozone with the break out of the financial crisis. To quantify the relation between the two, this paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the “pure” credit supply effect on corporate external financing in a sample period of 2003–2013. We find that tightened credit standards positively affect the NFC bond issuance: a 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms’ bond issuance in the eurozone. The substitution effect is net of the demand for bank lending and robust to factors such as price differentials. The impact of bank credit tightening on firms’ bond issuance is particularly observable in core eurozone countries. This is partially due to the underdeveloped debt capital markets in some countries.