One of the puzzles of 20th century macroeconomics is the extent to which capital market integration did not occur. Feldstein and Horioka (1980) famously observed that even among developed countries capital markets were barely integrated. However, signs of change in the aggregate data do appear in the mid 1990s (Blanchard and Giavazzi 2002). In addition, banking data also indicates that capital market integration is finally underway. The volume of cross border lending has risen dramatically, cross border bank mergers are common and barriers to foreign bank entry have broken down (Clarke, Cull, Peria, and Sanchez 2003).
The evidence with national data does not indicate exactly how market integration is taking place. In this paper we use disaggregated data on the syndicated loan market in Europe to investigate the patterns of capital market integration. More specifically, we examine two issues: first, the role that the syndicated loan markets plays in capital market integration, especially in countries with small financial systems and second, the role foreign banks play in the process.
The syndicated loan market provides a good laboratory to examine how integration takes place because it is large and has many cross border features. In this market firms can go to either domestic or foreign banks (ora consortium of both) that will syndicate a loan to buyers in any market.
We will use detailed data on syndicated loans, including interest rates, fromDealscan. We match the loan data with information about the borrowing firms from Amadeus. Thus, our data set includes detailed in format ion on lenders and borrowers throughout Europe for the period 1995-2007.
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Syndicated loans, foreign banking and capital market development
