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

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

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 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

11 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

12 Thank you Guonan Ma Senior economist Representative Office for Asia and the Pacific Bank for International Settlements