CORPORATE FINANCE WHEN MONETARY POLICY TIGHTENS: HOW DO BANKS AND NON-BANKS AFFECT ACCESS TO CREDIT by

The evolving financial environment facing the corporate sector provides many non-bank external finance options as an alternative to bank finance and this paper examines the relationship between UK firms’ choices over bank versus non-bank finance under different monetary conditions. We look at the external finance 'mix' using a panel of 16,000 UK firm records taken from the FAME database for the years 1990 through 1999 taking into account firm-specific characteristics. The paper provides support for a credit channel by demonstrating evidence consistent with a bank lending channel, accelerator effects and a broad credit channel for small, risky and young firms that shows all types of lending are reduced for these groups when monetary policy tightens. 1 This paper was written while the first author was Jean Monnet Fellow at the European University Institute, Florence, Italy. The support of the European University Institute is gratefully acknowledged. The second author acknowledges funding from the Central Bank of Turkey. Both authors would like to thank Spiros Bougheas and Simona Mateut for helpful comments.