European corporate bond issuance has had a rip-roaring year. The amount of debt issued has grown at a record pace, topping $2,000bn this week, according to Dealogic. Companies with top-notch credit ratings have circumvented their traditional lending banks and tapped investors directly. Demand remains robust: Italian electricity utility Enel kept up the pace on Friday with a €6.5bn issue. It could have raised more: investors placed orders totalling €28bn. One irony is that as corporate bond issuance has swelled, bank lending has slowed. Bond markets, furthermore, are open only to well-known names; small businesses still need banks. That raises the question: what do banks do?
One challenge they face is that governments have forced banks to hold more capital while at the same time expecting them to keep lending. Demand for credit is also low: not even the billions that central banks have chucked into the economy can change that or banks’ ability to lend. It is true that loan and working capital facilities can still be had, albeit at a price. Still, the risk is that banks become mere deposit gatherers and payment system providers, even as competition from new entrants, such as retailers, grows.
The corporate bond market’s popularity weakens arguments that banks play a socially useful role – although they have recycled some of their cash into government bonds, thereby funding stimulus packages and even bank bail-outs. To be fair, companies also need banks to underwrite and distribute their bond issues. And financial institutions are bond issuers in their own right, raising $543bn so far this year, with an average issue size of $1bn. Still, if banks can’t or won’t extend credit, at least abundant liquidity has prompted investors to lend in their place. If companies develop a lasting taste for bonds, banks may struggle to win back business after the crisis.