1. Banking regulatiuons and corporate bond market
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

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