Natural Bank Reliance

IMF Working Papers, June 13, 2025

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The higher aggregate prevalence of loan over bond funding in Europe is not only driven by differences in financial market settings but is also strongly shaped by different firm characteristics.
The European economy is more fragmented than the U.S. economy, leading to a different firm distribution in terms of size and collateral availability.
A counterfactual estimation indicates that if all European firms had access to a financial market like the U.S. market, their aggregate bond funding share would remain significantly smaller.
This counterfactual suggests a limited potential for European corporate bond markets in the short and medium term.

The paper estimates a counterfactual where European firms have access to a financial market like the U.S. market and assesses resulting changes in aggregate bond funding share.
Emphasis is placed on firm distributional characteristics (size and collateral availability) as determinants of funding structure, alongside financial market settings.

The findings imply constrained near- and medium-term room for expansion of European corporate bond markets given current firm characteristics and market structure.
Policy considerations would need to account for firm-size distribution and collateral constraints in evaluating measures aimed at developing corporate bond markets in Europe.

Subject: Bank credit, Bonds, Corporate bonds, Financial institutions, Financial markets, Money, Securities, Securities markets
Keywords: aggregate prevalence, Bank credit, bank funding, bank reliance, bond funding share, bond investor, bond share, Bonds, corporate bond bond market, Corporate bond markets, Corporate bonds, euro area., Europe, financial market setting, firm size distribution, Securities, Securities markets