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| Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing |
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#1
06-27-2012, 02:21 PM
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Why do banks issue bonds?
Working in pensions, I saw an impact of the recent bank downgrades on the discount rates we use for pension liabilities (which are based on high-quality corporate bond rates) after the high-quality bond universe shrank following the removal of a large number of bonds issued by the downgraded banks.
And that got me wondering, why do banks even issue bonds? If they're in the business of lending money, why are they borrowing money? They're sitting on a trillion or so of reserves due to low loan demand -- why not just borrow some of that? 
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#2
06-27-2012, 02:29 PM
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No real idea, but a guess...
To extend the duration of their liabilities? Aren't most/all of a bank's reserves duration 0 or close to it?
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#3
06-27-2012, 09:29 PM
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Mainly: a cheap way to raise capital.
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#4
06-27-2012, 10:40 PM
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I agree with MPC. If you can borrow at 5% and lend at 7% it makes sense to borrow as much as possible and collect the spread.
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#5
06-27-2012, 10:42 PM
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Possible tax advantages as well?
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#6
06-28-2012, 09:39 AM
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#7
06-28-2012, 10:05 AM
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#8
07-02-2012, 12:09 PM
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I think more often than not, the bonds you are seeing are issued by the holding companies sitting on top of the actual banks. The holding company may wish to raise cash to buy up a smaller bank, and it does so with the bond issuance.
Insurance companies do much the same. And now you can see why those bond ratings are in jeopardy. The mergers assumed a certain dividend flow back up to the holding company. But the banks got in trouble, and they are writing off certain assets - greatly impairing the abilbity to dividend up to that HC. With less cash flow going to the HC, the chances of principle or interest default are higher.
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Be what you would seem to be - or, if you'd like it put more simply - never imagine yourself not to be otherwise than what it might appear to others that what you were or might have been was not otherwise than what you had been would have appeared to them to be otherwise. - Lewis Carroll, In Philosophy Last edited by Eimon Gnome; 07-02-2012 at 12:14 PM..
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#9
07-02-2012, 12:50 PM
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