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CHECK CAREFULLY BASEL 3 LINK BONDS

bauer · 18 · 3871

bauer

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on: Oct 14, 2013, 03:53 PM
To all retail investors on Bank issued corporate bonds,

It is disheartening to note that our local banks are issuing corporate bonds to comply with the basel 3 standard set by international banking regulators.  Why disheartening?  It is because that bank's equity needs should be raised by the bank's owners using their own money instead of the hard earned savings of retail investors. 

The owners of the bank are taking the risk to lend the money to supposedly good creditors with valuable collaterals but I do think that the bank will take more higher risk for a higher reward (profits) because their own capital is miniscule to the risk of a loan default.

Imagine this scenario taking place

The bank lends 1 million to a corporate borrower.  The banks' own money (in terms of their capital) is about 120,000 only based on about 12% of the banks total liabilities (international banks are less than 4% at most). the balance of 880,000 came from depositors' money which the bank uses to give out the loan.

If the corporate borrower fails to pay, the bank owner's lost is 1,000,000 less any previous payment by the creditor plus the collateral will be confiscated in favor of the bank.  What if there is no collateral?  then the losses will be higher.  While if there is a collateral, the bank will spend additional money to convert the collateral to cash that can be use to recover the amount lend.

Imagine if there are too much loans that was on default, the bank will collapse and the total bank losses to its owners will be 120,000 only while the 880,000 will either be losses by depositors or the government (PDIC guarantee).  If PDIC will pay the losing depositors, tax payers and/or all depsoitors will be the eventual losers because PDIC will need to increase its premium rates to insure the deposits or it may seek a bail-out from the government which will later increase the taxes.

In the end, taxpayers or the public, will take most of the loses, not the bank owners who manage the bank to the ground.

Now, when we talk about the 12% capital of the bank, NOT all of the capital are money that came from the owners because under basel 3 rules, which our own central bank had adopted and enforced, capital can be raised thru issuance of corporate bonds by the bank.  It means, the bank owners can solicit funds from the public in order to meet their own capital requirements.  A sweet pot indeed!

Now, a careful note to buyers of bank issued corporate bonds.  Check your contract when you buy a bond with the bank if the bond's will serve as an underlying compliance with the basel 3 standard.  Why?

for the simple reason that IF THE BANK FAILS, those bonds will be the first one to be wipe out (meaning, its value will be ZERO) because it acts like an equity contribution disguised like a BOND or LOAN.

hard question for retail bond investors,   IF THE RISKS ARE SO HIGH,  IS THE FIX INTEREST PAID ADEQUATE TO COVER THE RISKS?

Banks really do have a good business in our country and the entire world as well.
« Last Edit: Oct 14, 2013, 06:42 PM by bauer »


ferrariEverest

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Reply #1 on: Oct 14, 2013, 04:47 PM
Enforced na pala yang Basel III? dito sa atin?? makapagbasa nga uli. :D

Regardless, mula noon, fractional reserve banking na sila. Therefore, whatever tactics gamitin nila shouldn't come as a surprise sa atin :D Ingat or iwas na lang


ahock

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Reply #2 on: Apr 29, 2014, 10:32 PM
if its not part of equity and the bank fail edi wipe din ang bonds right?


wilch23

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Reply #3 on: May 03, 2014, 09:54 AM
The money of the bank actually at risk with that 1M loan is less than you said. Go study the theory of money and lending/banking and money supply. Search imaginary money to get an idea of the multiplying effect of banking/lending on the money supply.
« Last Edit: May 03, 2014, 09:55 AM by wilch23 »


bigporkydude

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Reply #4 on: May 06, 2014, 07:48 PM
Another reason not save Money.  :dunno:


bauer

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Reply #5 on: May 06, 2014, 08:08 PM
^ NO, I think we needed to SAVE MONEY in our banks.  What I just advise the readers were to AVOID purchasing or investing in basel 3 link bonds issued by banks.


wilch23

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Reply #6 on: May 07, 2014, 09:53 AM
If you equate money as cash, then i have to agree, just enough cash in the bank, more is bad, especially if you're young. You need to transfer your money to better investment instruments.


freefront

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Reply #7 on: May 07, 2014, 10:01 AM
I just got acquainted with FACTA. What's with Basel 3?


vicces

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Reply #8 on: May 07, 2014, 10:09 AM
fatca. acquaint some more. :P
« Last Edit: May 07, 2014, 10:29 AM by vicces »


Prospera

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Reply #9 on: May 07, 2014, 10:20 AM
^Magagalit si ff sa iyo--hindi kaya siya majubis!  :p


vicces

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Reply #10 on: May 07, 2014, 10:31 AM
how do u know dat? :taaskilay:


freefront

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Reply #11 on: May 07, 2014, 11:10 AM
Is all good P.  :D It is fatca. I'm just full of dog hair right now  :hihi:


Prospera

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Reply #12 on: May 07, 2014, 12:28 PM
how do u know dat? :taaskilay:


Majubis ba si Kate Beckinsale?

N.B. For the uninitiated, majubis= gayspeak for mataba (fatca, get it?) :D


vicces

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Reply #13 on: May 07, 2014, 12:58 PM
wahowwww Kate Beckinsale... wooowww!!! :hihi:


wilch23

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Reply #14 on: May 10, 2014, 11:23 AM
RP credit rating up -S & P.


 


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