Instead, they were taking advantage of the rapid growth in the commercial paper market in the late 1960s and shifting their lending activities away from consumer loans and toward business lending. By 1975, the volume of business lending by finance companies exceeded their consumer lending for the first time. This trend has continued unabated to the present. However, finance companies, which once played a very minor role in business lending, have now captured a very significant market share. Fama offered the following observation on the uniqueness of banks commercial lending activities.
Bank loans represent a short-maturity funding source that requires frequent renewal.
Therefore, banks are on the front line of establishing and continually reevaluating the creditworthiness of firms. A bank s willingness to lend to a firm is a valuable signal that is readily observed by the capital markets and by other potential creditors to the firm, as well as by the firm s clients and suppliers. Fama notes that it is common practice for many firms to incur the cost of establishing a line of credit with a bank, even though they may never intend to use it, in order to ensure that this signal is being sent. Bank loans play a similar role in establishing the creditworthiness of households. Several of the reasons below focus on the unique ability of a bank to offer demand deposits.