Ben Broadbent observes that the risk-free interest rate in the UK has fallen steeply since the onset of the financial crisis, and that quoted rates on new bank loans have declined. This, on its own, should spur new investment. But anecdotal and empirical evidence suggests financial markets and firms are behaving as if the cost of funding new projects has actually increased. That is partly because credit is being rationed by banks, who may only be willing to extend new loans to firms who keep debt within certain limits or hold minimum amounts of cash. Consistent with this, there is evidence that larger firms have been switching away from bank debt towards issuing debt and equities. This suggests that quoted interest rates significantly understate the true cost of bank debt.
Published on 28 May 2012
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Minutes of the Wholesale Distribution Steering...
Minutes of the Wholesale Distribution Steering Group - October 2019
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