European Central Bank publishes research finding euro area corporate bond markets are as integrated as those in the United States

The European Central Bank has published Working Paper No 3235 by Livia Chiţu, Sofia Gori and Refet S. Gürkaynak on market-based versus bank-based external finance premia. The paper, which the ECB notes does not represent the views of the institution, finds that euro area corporate bond markets are as integrated as those in the United States. For corporate bonds, neither the issuer’s country in the euro area nor state in the United States materially changes the transmission of monetary policy or explains much of the variation in bond spreads, while bank loan spreads remain strongly shaped by national factors. Using micro-level data on corporate bonds, issuers, investors and euro area bank loans, the authors find that country or state effects explain very little of corporate bond spread variation in either monetary union, with country or country-time fixed effects accounting for less than 10% of variance in euro area bond spreads outside the sovereign debt crisis period. The paper also finds that ECB and Federal Reserve monetary policy surprises pass through to corporate bond spreads in a broadly homogeneous way across issuers. By contrast, euro area bank loan spreads for the same bond-issuing firms are still determined at the country level, and lending remains predominantly domestic, while corporate bonds are held by more geographically diversified investors. The authors argue that these results point to a fundamental difference between bank finance and market finance rather than to special characteristics of bond-issuing firms. They also identify further research questions around why euro area firms issue less corporate debt than US firms and how far bank and market finance can substitute for each other.