Banks No Better Than Institutionals at Securing Loans, Says Regulator

Finance Ministry commissioner of capital markets, insurance and savings finds that during 2008 global financial crisis, banks had to write off more bad loans than institutionals.

Despite their reputation, banks aren't any better at securing loans than institutional investors are, found the Finance Ministry's commissioner of capital markets, insurance and savings.

Institutional investors have taken a particularly bad rap in terms of how they safeguard the public's pension savings, in the wake of a string of major companies demanding debt arrangements. In every case, the banks seemed to be in better standing - they demanded proper security, but the institutionals didn't.

Yet during the 2008 to 2009 global financial crisis, banks had to write off more bad loans than institutionals, found the commissioner. The banks wrote off 7% of their corporate loans, while the institutionals lost only 6.5% of their corporate bond portfolios.

There are two reasons for this, said the regulator. The first is that the capital market demands higher interest rates than banks do. This helps offset some of the bad loans.

The other reason is that banks' corporate loan portfolios are very risky. Banks are the main source of financing for purchasing controlling shares in major companies. The loan generally is secured by the company's stock. If it turns out the acquisition was not quite as attractive as the buyer thought, and the share price drops, the bank will find itself with nearly no security.

The regulator said the wave of debt rearrangements is a remnant from an earlier age before the Hodak reforms. The Hodak committee sought to force institutionals to make sure they received proper security for their bond purchases. While companies have been reluctant to post such security, this will change, stated the regulator.