Breaking up banks: 2

Corporate bond markets and big banks are competitors for supplying funding to corporates, and this tension is worth reflecting on as the debate warms up internationally on the structure and regulation of the biggest banks.

As Boot & Thakor point out in their 1997 paper "Financial System Architecture", there will be institutional resistance from existing banks as markets grow in prominence but unless the actions of the banks are coordinated (which they should not be, if they are competitive) it will be unlikely that the growth of the market can be retarded.

Thus it is possible that the critical factor in the development of markets is the fragmentation of the banking sector, which in turn will depend on the number of banks in the industry. Conversely, in a small concentrated banking market it is difficult for a fully functioning corporate bond market to develop.

Interestingly, in a subsequent paper (2008) Boot & Thakor conclude that banks and markets have now become increasingly integrated and co-dependent, and that this is at the root of the GFC. As markets evolve and entice customers away from banks, banks have an incentive to develop new products and services that effectively follow their customers to the market.

In this way the banks have become increasingly integrated with markets and a co-dependence emerges. Isn't this what King, Volker and Argus are saying?

As an aside, BHP Billiton has only issued three bonds in the domestic market, the last of which was a A$750 million, seven-year, bond that matured in August last year. A new bond issue would no doubt be welcomed by investors and would show support for the development of the market.

However, we know that the company does not have a great need for Australian dollar funding and the domestic market cannot compete with the €2.25 billion and US$3.25 billion BHP Billiton raised offshore in March.