Capital Market - Difference Between Regular Bank Lending and Capital Markets

Difference Between Regular Bank Lending and Capital Markets

Regular bank lending is not usually classed as a capital market transaction. A key difference is that with a regular bank loan, the lending is not securitized (i.e. it doesn't take the form of resalable security like a share or bond that can be traded on the markets). A second difference is that lending from banks and similar institutions is more heavily regulated than capital market lending. A third difference is that bank depositors and shareholders tend to be more risk averse than capital market investors. The previous three differences all act to limit institutional lending as a source of finance. Two additional differences that favor banks is that they are more accessible for small and medium companies, and that they have the ability to create money as they lend. In the 20th century, most company finance apart from share issues was raised by bank loans. But since about 1980 there has been an ongoing trend for disintermediation, where large and credit worthy companies have found they effectively have to pay out less in interest if they borrow from the capital markets rather than banks. The tendency for companies to borrow from capital markets instead of banks has been especially strong in the US. According to the Lena Komileva writing for The Financial Times, Capital Markets overtook bank lending as the leading source of long term finance in 2009 - this reflects the additional risk aversion and regulation of banks following the 2008 financial crisis.

Read more about this topic:  Capital Market

Famous quotes containing the words difference between, difference, regular, bank, lending, capital and/or markets:

    There is a difference between eating and drinking for strength and from mere gluttony.
    Henry David Thoreau (1817–1862)

    Man is the only animal that laughs and weeps; for he is the only animal that is struck with the difference between what things are and what they ought to be.
    William Hazlitt (1778–1830)

    This is the frost coming out of the ground; this is Spring. It precedes the green and flowery spring, as mythology precedes regular poetry. I know of nothing more purgative of winter fumes and indigestions. It convinces me that Earth is still in her swaddling-clothes, and stretches forth baby fingers on every side.
    Henry David Thoreau (1817–1862)

    When she could hide him no longer she got a papyrus basket for him, and plastered it with bitumen and pitch; she put the child in it and placed it among the reeds on the bank of the river.
    Bible: Hebrew, Exodus 2:3.

    If there is among you anyone in need, a member of your community in any of your towns within the land that the LORD your God is giving you, do not be hard-hearted or tight-fisted toward your needy neighbor. You should rather open your hand, willingly lending enough to meet the need, whatever it may be.
    Bible: Hebrew, Deuteronomy 15:7,8.

    In bourgeois society capital is independent and has individuality, while the living person is dependent and has no individuality.
    Karl Marx (1818–1883)

    When the great markets by the sea shut fast
    All that calm Sunday that goes on and on:
    When even lovers find their peace at last,
    And Earth is but a star, that once had shone.
    James Elroy Flecker (1884–1919)