The diversification benefits of universal banks

We estimate reduced form equilibrium conditions of the markets for outstanding aggregate loans, and new issuance of bonds and stocks in the US. We find that boththe aggregate issuance of bonds, and the volume of loans outstanding respond to fluctuations in industrial production and interest rates, but moving in opposite directions. We then model the conditional correlation between bonds and loans and find that it is negative for most of the sample. Finally, we jointly study different classes of loans, finding that they display a substantially different behavior over the cycle, they respond to different macroeconomic variables, and the conditional correlations among them are fairly low. These empirical results suggest that universal banks can potentially reduce the cyclical fluctuations of their revenues, by providing direct lending to different classes of agents, and by jointly providing both lending, and securities underwriting services.