The so called portfolio approach to credit supply (for an overview see Fase (1995)) starts with the assumption that banks maximize a utility function under a set of balance sheet constraints which allows to derive directly credit supply functions. However, the derivation assumes a perfect financial market while treating the private sector (comprising the corporate and household sectors) as one homogeneous entity. These limitations restrict the use of this model when trying to address the specific issues related to corporate finance in imperfect markets. The demand for any type of credit – including firm’s demand for commercial bank credit.
