Are Banks Still Important for Financing Large Businesses

As more corporations turn to the securities markets to meet their funding needs, the role of banks as providers of credit to large businesses seems increasingly uncertain. But a look at developments during the financial market turmoil last fall suggests that banks are still a critical source of liquidity at times of economic stress. Over the past twenty-five years, an increasing number of financial transactions have moved from banks to the securities markets. During the same period, competing financial institutions have expanded the range of traditional banking services they offer customers. Both thrifts and finance companies now provide loans to small businesses, and money market mutual funds offer close substitutes for checkable deposits. This shift toward the financial markets and nontraditional financial institutions has significantly reduced the role of banks in providing credit to U.S. businesses. The decreasing