Read on Twitter
1/8
For the past 2-3 years regulators have encouraged Chinese banks to issue perpetual bonds as a way of recapitalizing. The newest twist involves perpetual bonds with an equity-conversion feature, with two Zhejiang banks selected for pioneering issues. https://www.caixinglobal.com/2021-01-26/china-gives-small-and-midsize-lenders-new-tool-to-replenish-capital-101656195.html?cxg=web&Sfrom=twitter
For the past 2-3 years regulators have encouraged Chinese banks to issue perpetual bonds as a way of recapitalizing. The newest twist involves perpetual bonds with an equity-conversion feature, with two Zhejiang banks selected for pioneering issues. https://www.caixinglobal.com/2021-01-26/china-gives-small-and-midsize-lenders-new-tool-to-replenish-capital-101656195.html?cxg=web&Sfrom=twitter
2/8
The problem is that most of these bonds, as I was told by two former students working in the industry, are bought by other banks, and what is worse, usually by similarly-sized banks in similar markets. In this case, for example, my understanding is that most of...
The problem is that most of these bonds, as I was told by two former students working in the industry, are bought by other banks, and what is worse, usually by similarly-sized banks in similar markets. In this case, for example, my understanding is that most of...
3/8
the bonds were purchased by other small Zhejiang banks. Similarly, the big national banks are the main buyers of each other's perpetual bonds, regional banks are the main buyers of perps issued by other regional banks, and so on.
the bonds were purchased by other small Zhejiang banks. Similarly, the big national banks are the main buyers of each other's perpetual bonds, regional banks are the main buyers of perps issued by other regional banks, and so on.
4/8
This matters because it means that a meaningful portion of total bank capital consists of liabilities of other banks, so that a problem in one bank translates automatically into a problem for another. This wouldn't matter if an individual bank gets into trouble because...
This matters because it means that a meaningful portion of total bank capital consists of liabilities of other banks, so that a problem in one bank translates automatically into a problem for another. This wouldn't matter if an individual bank gets into trouble because...
5/8
it means its losses would be spread out among other similar banks, but if there is a problem with many banks comprising a substantial part of the banking system, then the problem of each individual bank compounds the problems of all the others. It becomes highly...
it means its losses would be spread out among other similar banks, but if there is a problem with many banks comprising a substantial part of the banking system, then the problem of each individual bank compounds the problems of all the others. It becomes highly...
6/8
self-reinforcing at the worst possible time. While individual banks are better capitalized, in other words, the banking system isn't. With RMB 1.2 trillion of these bonds outstanding, total capital in the China banking system may be overstated by perhaps over RMB 1 trillion.
self-reinforcing at the worst possible time. While individual banks are better capitalized, in other words, the banking system isn't. With RMB 1.2 trillion of these bonds outstanding, total capital in the China banking system may be overstated by perhaps over RMB 1 trillion.
7/8
Unfortunately we usually only discover this at the worst possible time. I was part of the team that advised the Mexican government on the privatization of its national banking system in 1990-91, and I remember that in order the maximize the purchase prices, the regulators...
Unfortunately we usually only discover this at the worst possible time. I was part of the team that advised the Mexican government on the privatization of its national banking system in 1990-91, and I remember that in order the maximize the purchase prices, the regulators...
8/8
looked the other way as banks directly or indirectly invested in each other's capital. Of course the result was that during the banking crisis of 1995, what seemed like a well-capitalized banking system was decapitalized almost overnight.
looked the other way as banks directly or indirectly invested in each other's capital. Of course the result was that during the banking crisis of 1995, what seemed like a well-capitalized banking system was decapitalized almost overnight.
