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Banking regulatiuons and corporate bond market

Guonan Ma

Workshop on developing corporate bond markets in Asia

Asia-Pacific Financial and Development Centre

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27 September 2007, Shanghai, China

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An outline

Bank lending versus corporate bonds

Principal aspects of banking regulation

Implications for corporate bond market

Conclusions

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I. Bank lending versus corporate bonds

Direct versus indirect financing Private loans and tradable bonds Intermediation and direct funding

Evolution of financing --- the perking order Self financing Inside financing External financing

Two competing forms of corporate financing In Asia, markets are gaining, but banks still dominate

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Banking system versus bond market

Banks and markets are also complementary

Corporate bond market as a financial “spare tyre” Short-term credit markets prone to sudden stops

(Asian crisis in 1997 is example) Corporate bond market can step in when short-term

market seizes up

Bank itself can be a arranger, underwriter, investor, fund manager, and trader in bond market

Competition enhances efficiency and encourages innovation

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II. Principal aspects of banking regulations

The banking sector is among the most regulated

The fixed income market is also regulated Sometimes more heavily but differently Efforts needed to compare them more systemically

The banking system and bond market in one economy may be regulated by

one single regulator different regulators or multiple regulators

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Principal aspects of banking regulation

Restrictions on asset holdings and activities

Separation of banking and other financial service industries

Capital requirements

Deposit insurance or implicit safety net

Disclosure requirements

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III. Implications for corporate bond market

No systematic research on the subject

Most likely mixed, complex and interactive Bond market development may in turn influence bank

supervisory regulations

More questions than answers

Some selective examples may be a useful approach

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Examples (1)

Restrictions on asset holdings and activities Investing in stocks is often not permitted Issuers are better credits than small loan borrowers But what about bonds with significant equity attributes?

Separation of banking & other financial service industries Investment banking services Managers of fixed income mutual funds Competition versus abuses

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Examples (2)

Capital and sub debt requirements (Basel I & II) Intensity of application Subordinated debt requirement Incentives for securitization Off-balance sheet activities (conduits) Hybrid bank capital instruments?

Disclosure requirements a virtual cycle

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Examples (3)

Deposit insurance or implicit safety net Protecting depositors What about bond investors or fund investors? Conflict of interest and safety extension: fire walls

Banks and markets are regulated by either a single super regulator or multiple agencies

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IV. Conclusions

Bank loan and bond are competing and complementary

Banking sector and bond market are both regulated, though differently

Banking regulations mainly include restricted business scope and asset holdings, capital and disclosure requirements, and deposit insurance

Implications for corporate bond market development are mixed and two-way

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Thank you

Guonan Ma

Senior economist

Representative Office for Asia and the Pacific

Bank for International Settlements

Email: Guonan.ma@bis.org