Banking regulatiuons and corporate bond market 06.12.2018 Banking regulatiuons and corporate bond market Guonan Ma Workshop on developing corporate bond markets in Asia Asia-Pacific Financial and Development Centre 27 September 2007, Shanghai, China 1

An outline Bank lending versus corporate bonds Principal aspects of banking regulation Implications for corporate bond market Conclusions

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

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

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

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

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

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

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

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

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

Thank you Guonan Ma Senior economist Representative Office for Asia and the Pacific Bank for International Settlements Email: Guonan.ma@bis.org