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Study of the effectiveness of the mechanisms of the secondary bond market constraint

Author: FuZuo From: www.yourpaper.net Posted: 2009-04-01 19:55:33 Read:
[Abstract] Subordinated Bonds (Subordinate Debt), refers to the repayment of the order of superior equity, but inferior to a creditor of a special claims form. Broad way this debt to international commercial banks to improve the capital structure, or to adjust the duration of its assets. At the same time, as a creditor, it has less issuance costs not dispersed the advantages of commercial banks control over the tax-free and interest expense. The purpose of this paper is to explore the subordinated bonds as a market constraint tools, whether to run in our country can be truly effective. This article will be discussed in the first part of the various characteristics of the subordinated bonds, discussed in the second part of the secondary bond market restraint mechanism, the third part through the analysis of the role of the process of the secondary bond market constraints, discussion of subordinated bonds constraints in our the validity of the fourth section summarizes and suggestions.
[Keywords] secondary bond market constraint mechanism

First, the characteristics of the subordinated bonds

1, compared with equity. Similarities of subordinated bonds and stocks is that: first settled order are quite behind, and are uninsured, unsecured. Second, are long-term investment, the stock is permanent. The subordinated bonds are generally also more than five years before the repayment periods can not be withdrawn, and only for sale in the secondary market. Third, as the bank's capital, they all can be used as commercial banks risk buffer, to reduce the likelihood of bank failures, the protection of bank deposits.
Subordinated bonds with different stock that: First, it is also sensitive to the risk, but the stock of the rights and interests of people can enjoy larger gains to shoulder a greater risk, but the interests of the subordinated bonds can only enjoy a fixed risk premium income, but must bear the bank unable to pay due to the failure of risk management in the possibility. Second, to shareholders for the management of commercial banks have the right to vote, but interest in subordinated bonds only banks are facing bankruptcy liquidation in order to participate in the management banks. Third, equity as core capital can be offset against the Bank of day-to-day operating losses, as a subsidiary of the capital and subordinated bonds, can not be used to offset the loss.
2, and compared to bank deposits. Subordinated bonds and bank deposits similar point is that: first, in the collapse of banks encounter risk, they have not the possibility of reimbursement. Second, they are all claims on bank management have no voting rights. Third, they are nominal or actually fixed interest rate, can not get a risk premium.
Different points of subordinated bonds and bank deposits in that: first, the subordinated bonds than deposits reimbursement order later, and the protection of the deposit insurance depositors, subordinated bonds are unsecured, uninsured. Second, under normal circumstances, the deposits can be removed at any time, and is not liable for any loss of principal, and subordinated debt can not be repaid ahead of schedule, only for sale in the secondary market, you may experience a loss of principal. Third, for the banks, the long duration of the subordinated bonds, subordinated bonds financing more than ordinary deposits stable. Unable to pay the deposit of a bank run on the inter-bank contagion effect may lead to not subordinated bonds.
From the above, the shareholders of the bank holding may deliberately take more risks in their operations in order to obtain a higher risk premium. Depositors the earliest settled order and dominant or recessive deposit insurance, bank risk less sensitive. In contrast, the risk of the subordinated debt of the owner of the bank is highly sensitive, and undertake unilateral risk, bank risk premium can not be obtained, they would want the banks to take fewer risks, to reduce the possibility of bankruptcy. Meanwhile, regulators hope for commercial banks as sound management, avoid bankruptcy and lead to social instability.
In essence, the subordinated bonds designed a debt structure so that this part of the interests of the people, the spontaneous formation of commercial banks operating risk analysis and oversight, and ultimately achieve commercial bank market constraints.

Second, subordinated bonds of banks market discipline mechanism

1, direct market constraints. Refers to the the secondary bond investors level of interest paid by the Bank on its issuance of subordinated bonds to issuer banks in a market constraints.
2, indirect market constraints. Refers to the interests or financial regulatory authorities by monitoring the secondary market price of the subordinated bonds, assessment of debt issuance bank formation pressure.
3, prompting regulators to shut down troubled banks, preventing further loss. Holders of subordinated bonds in order to reduce losses, will supervise the financial supervisory authorities to take decisive corrective action on the problem bank supervision and administrative regulation, market supervision. Subordinated bonds by the different mechanisms controlling bank risk. However, the market environment, the lack of restraint mechanisms may lead to failure.

Third, the market discipline mechanism problem

1, a unified, transparent information disclosure mechanism. Issuance of subordinated bonds of commercial banks "of the recent introduction of" clear the operating conditions on the issuer's financial disclosure and disclosure of relevant content related to the issuance of subordinated bonds. But first, the disclosure of information is not detailed enough, no mention of the risk exposure, the contents of the internal rating mechanism for capital and risk management strategies. Second, the credit rating of subordinated bonds to expose an important indicator of the operational risks and financial risks, but our country did not yet have the authority of the rating agencies. Again, weak corporate governance mechanisms, auditing standards and accounting system is not standardized and greatly affects the quality and the role of the information disclosed. Finally, included in China's banking relationship lending special, non-quantifiable information, can not be an effective form of information channels prompted to outside investors.
2, a significant number of qualified investors. "Qualified" the investors contains the meaning is: a large scale and a stronger ability to assess risk. At present, China has not yet formed the non-bank institutional investors with sufficient scale. Private investors due to the smaller and more willing to hitchhike. Rather than to supervise foreign investors for emerging market debt investment has always been little interest. Market, firms and insurance companies with strong financial strength and long term structure of funds, but CIRC very strict restrictions on the number of insurance company investment bank subordinated bonds.
The firm holds a lot of each other bonds between become a helpless selection. This makes the subordinated bonds more reduced to mere tools in the form of adequate capital, it will result in the increase of the systemic risk in the inter-bank.
3, incentive compatible financial safety net. Interests in subordinated bonds that the State will give bank bailouts in commercial bank failures, management will be more inclined to take risks. Reduced sensitivity of the subordinated bondholders of bank risk, thereby distorting the bond pricing. The state-owned shares of the vast majority of China's commercial banks have an implicit government guarantee occupy a pivotal position in the commercial bank's reputation, which greatly weakened the secondary bond investors concerns the risk of commercial banks.
4, bank corporate governance mechanisms. The effectiveness of corporate governance mechanisms, management will reduce the risk due to the excessive cost of financing. But there is a larger gap between the property rights system of China's commercial banks, governance mechanisms and strict sense of the modern enterprise system, will seriously affect the effect of subordinated bonds.
5, strong enough bond market liquidity. Issuance of subordinated bonds of commercial banks "provisions of the private placement of subordinated bonds can only transfer between subscribers, and the public offering of subordinated bonds," approved by the People's Bank may be listed for trading in the inter-bank bond market , showing no clear subordinated bonds in the secondary market, the subordinated bonds in order to timely respond to the operating conditions of the commercial banks is simply unrealistic, liquidity almost does not exist.
6, effective means of supervision. The powerful regulatory least two aspects: First, regulators do have the same motives and interests of the curve with subordinated bondholders. Second, an effective regulatory system. Unclear property rights system of China's state-owned banks, regulators coincide with the operators of the state-owned banks to a certain extent, At this time, whether the motive of the regulator is to reduce risk or increase income, it is not so easy to identify.
In addition, the regulatory system of commercial banks, there are also problems: First, the lag. Often can not be found to the the banks existing problems and react. Second, subjective and arbitrary. Regulatory system is the lack of checks and balances. Third, non-fairness. The supervision of the various commercial banks tend to use a non-uniform standards.

IV Conclusion

In the current financial market environment, the secondary bond market restraint mechanisms is subject to a variety of obstacles, can not achieve the desired effect of the automatic monitoring of bank risk.
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