Romblon State University
College of Business and Accountancy
Graduate Education and Professional Studies
Position Paper on Seminar on Current Economic Problems
RONALD P. GERVACIO
Why some firms borrow from banks as opposed to issuing
bonds?
How does a bond work?
Institutions like the Federal Government, private companies and local
governments, issue bonds as a type of “IOU” to borrow money to fund projects.
Investors purchase bonds and in return, are guaranteed by the issuer some type of
return rate for their investment.
Once the bond is purchased, the issuing agents take the money to use as they see fit.
The investor then holds onto their bond until the maturity date and redeems it when the
time has come.
Corporate bonds afford both investors and those seeking funding a grand opportunity to
thrive, as investors make a profit from the lending, and the issuer gains spending
freedom.
Why are bonds preferred over banks?
Although many companies are legally entitled to borrow from a bank, the process is
costly and time consuming. Companies issue bonds rather than borrow from banks
because the bond process is viewed as less prohibitive, and a cheaper option than
going the conventional bank loan route. The reason being is that banks place
“covenants” (rules) on the money being borrowed that may limit the flexibility a company
has in operating its business. This is understandable as the bank is only trying to
mitigate risks involved with the money they loaned to increase their odds of getting
repaid.
On the other hand, when companies issue bonds rather than borrow from banks, bond
holders do not put restrictions on the terms of the arrangement. The companies set up
the rules for the bonds value and maturity, and the bond markets tend to be a bit less
rigid than the banks. For these reasons, companies prefer to issue bonds versus
borrowing from a bank as they get the funding and spending freedom they require.
In spite of the fact that both of these basic terms are related and utilized essentially for
financing a commerce, they still have center contrasts particularly in sources and
liquidity. Bond could be a long-term obligation instrument issued by a company,
who points to raise reserves for its operations, to an speculator who is willing
to loan cash by offering it through security markets. . This obligation instrument
is exceedingly fluid which can be sold by the introductory holder to another indeed some
time recently its development. Bank credit, on the other hand, is
an understanding wherein a bank concurs to loan a certain company the reserves that
the last mentioned needs with terms and conditions on how the money will be paid.
This assention is made specifically between the loan specialist and the borrower
without exchanging through markets.
Another reason is that banks have scale economies and comparative preferences within
the generation of data and debt-related observing. They have get
to to interior information, whereas private speculators ought
to depend on freely accessible data. This get to to data is what a few firms take
into thought why they lean toward bank advances to raise reserves since they
are guaranteed that their records are kept private by the bank. More often than
not these are the firms who need to secure their
status particularly their monetary position from the public.
Reference: https://www.gobankingrates.com/investing/bonds/why-companies-issue-
bonds-vs-borrowing-bank/
Why
Whybanks
banksresulted
resultedto
toaabank
bankrun?
run?
Banks are store mediators that borrow stores from loaners and loan them to borrowers
more effectively than the person loan specialists and borrowers can do on their claim.
Banks’ benefits are determined from the values included by changing the category,
development term to repricing, credit quality, money of category, and so forward of the
securities sold to banks or bought from borrowers and accepting the related dangers.
Modern banks regularly raise most of their reserves by offering short-term fixed-value
obligation securities (stores), numerous of which contain put choices exercisable by the
depositor at standard at any time. They contribute their reserves in securities that for the
most part are not fixed-value and don't contain put alternatives exercise- able by the
bank at standard at any time. In this way, the banks accept the hazard that the
showcase esteem of their resources may decrease to or underneath that of their store
liabilities since of startling changes in intrigued rates, defaults, outside trade rates,
regulations, fraud, and so on. To secure themselves against having to bear the chance
of misfortune, depositors, like several other banks, will, within the nonappearance of
store insurance or ensures, both screen the risk/return profile of their banks’ resource
and risk portfolios and their capital (value and subordinated obligation). The poorer the
risk/return profile and the littler the capital base, the more noteworthy is the probability
that a stun will wipe out a bank’s capital which investors may involvement a misfortune
in case the bank isn't recapitalized or sold as before long as the advertise esteem of its
net worth drops to zero. It shows up sensible to accept that the more noteworthy the
likelihood that investors put on this happening, the more likely they are to pull back their
stores at the prior of the deposits’ development date or work out date of the put
alternative. The prior the depositor is able to pull back the store, the more likely is the
depositor to get the total sum of his store on time. As long as the fetched of exchanging
stores is littler than the esteem of the progressing managing an account relationship,
the judicious depositor will seek after a better-safe-than-sorry technique within the
confront of unfavorable news approximately his bank’s future prospects. In case a
expansive number of a bank’s investors at the same time relegate the same tall
likelihood of potential misfortune to the bank’s resources, the bank will involvement
expansive concurrent demands for deposit withdrawals, that's , the bank will
involvement a run. Depositors, of course, may be adjust or erroneous in their evaluate-
ment of a bank’s budgetary quality. The suggestion of the run both for the bank and for
the investors depends in huge portion on the rightness of the depositors’ appraisal.
Bank runs always expected by banks as the risk default situation. Since this is expected
to happen for the bank and their operations, banks already have alternative solutions to
this problem before this to be encountered. Most of the banks especially those who are
still on growing period cannot handle this risks. The Bangko Sentral ng Pilipinas (BSP)
extend their help and solutions as banks in the Philippines is resulting to a bank
run.
As banks suffering to this situations, they have some solutions not to arise bank
run as default situation. Aside from controlling their internal operations and actions
through slowing and regulating the banking hours for them to limit the clients for
withdrawing their deposits, and some are declaring bank holidays and closing to reduce
the full-blown panic of depositors’ withdrawal.
With this issue, here comes the Bangko Sentral g Pilipinas to give another results
of assistance through letting the bank on run lend amount of money as a cash on hand
on their branch. Bangko Sentral ng Pilipinas also ensured that banks informed their
clients/depositors that bank has deposit insurance and is currently persists. That's why
you see the letters "FDIC" on the door of every bank in the country today. It's a promise
that even if the bank goes under, the government will guarantee that ordinary people
get their money back. This promise alone has ended bank runs almost entirely. BSP
also allow banks to borrow money from them especially when people rush to withdraw
their
money from the bank when they're afraid the bank is about to run out of money. So if
the bank can borrow a bunch of money that usually stops the run. In our case now as
the country is suffering pandemic, we might expect more withdrawals from banks as
people are needing cash for their needs and to support their economic activities.
Bangko Sentral ng Pilipinas has been performing simulations to
determine the hits of this pandemic on all banks. Generally and so far, most of the
banks and cooperative banks are affected. To help those banks during this kind of
circumstances that may have a great cause for the expected default situation of bank
run,the BSP implemented measures such as reducing the reserve requirement ratio so
that the banks have enough cash on hand on their branch to prevent running out of
cash.Bangko Sentral ng Pilipinas act as a last resort for lending to individual banks
during crisis like a bank run.
