Going-Concern Debt of Financial Intermediaries
We study asset and debt characteristics of US bank holding companies. We show that financial institutions, especially large institutions, are not just about holding discrete assets. Services and going-concern values are important, and capital market debt against going-concern values accounts for 10% to 15% of total assets, comparable to the volume of capital market debt against discrete assets. We find that financial institutions’ debt against going-concern values has weak monitoring, relative to similar debt among non-financial firms. We argue that weak monitoring prevails because creditors cannot easily punish or restructure these institutions should they violate covenants, which limits covenants’ usefulness.
We thank Felipe de Souza Netto and Ammon Lam for excellent research assistance. We thank Jason Donaldson, Martin Oehmke, Giorgia Piacentino, Yao Zeng, seminar participants at Columbia and New York Fed, and conference participants at SED and AEA for helpful comments. The views expressed here are those of the authors and do not necessarily reflect those of the National Bureau of Economic Research.