But they are particularly important in the case of innovative projects in Spain, where external finance comes mainly in the form of bank loans, due to the absence of sufficiently developed alternative capital markets, as evidenced by the fact that bond issues still represent barely 10% of the total finance received by Spanish non-financial corporations, compared with 40% in the USA. 9  See S. Fazzari, R. Hubbard and B. Petersen (1988), “Financing Constraints and Corporate Investment”, Brookings Papers on Economic Activity, vol. 1, pp. 141-206. 10 See A. Goodare and I. Tonks (1995), “Finance and Technological Change”, in P. Stoneman (ed. ), Handbook of the Economics of Innovation and Technological Change, Wiley-Blackwell, pp. 298-341. 14/18  Financing innovation  The most recent period has seen some growth of non-bank financing in Spain and a certain improvement in the allocation of bank financing compared with the period immediately before the crisis, during which the firms receiving credit were characterised by their low productivity and a high proportion of real estate assets on their balance sheets. This largely explains the low dynamism of aggregate productivity in that period.11 By contrast, in the recovery phase funds tended to go to firms with a comparatively more favourable economic and financial position and which were more productive.12 In any event, this relative improvement in the allocation of bank credit cannot be allowed to hinder the development of specific financial products to facilitate the financing and growth of small and/or newly created innovative firms.
In view of those suggestions, and after considering the greater risks to the financial system posed by the Bear situation, we were able to work quickly on a companion facility that would transmit liquidity to parts of the market where it could be most powerful. This is what led the Board of Governors of the Federal Reserve System to approve the establishment of the Primary Dealer Credit Facility on March 16. Under Section 13(3) of the Federal Reserve Act, the Board of Governors is empowered to authorize a Federal Reserve Bank like the New York Fed to lend to a corporation, such as an investment bank, in extraordinary circumstances under which there is evidence that the corporation cannot “secure adequate credit accommodations from other banking institutions.” The Board of Governors needed to make the statutory finding that the circumstances were exigent and extraordinary, and it did so, based on the situation prevailing in the financial markets and the distinct possibility that absent an assurance of liquidity to major investment banks the deterioration in financial conditions likely would have continued with substantial effects on the economy. We recognized, of course, that the use of this legal authority was, in itself, an extraordinary step. At the same time, we were mindful that Congress included this lending power in the Federal Reserve Act for a reason, and it seemed irresponsible for us not to use that authority in this unique situation.