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Bond market development: what are the policy issues Philip Turner Presentation at the Brookings Inst

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Title: Bond market development: what are the policy issues Philip Turner Presentation at the Brookings Inst


1
Bond market development what are the policy
issues?Philip Turner Presentation at the
Brookings Institution/IMF/World Bank Conference
on Future of Domestic Capital Markets, 14-16
April 2003, Washington DC
2
Bond markets essential.to generate market
interest rates that reflect the opportunity cost
of funds across the maturity spectrum
3
Good news Domestic bonds outstanding doubled to
2,000 billion in six years
  • Lower inflation
  • Government borrowing strategy
  • Financial liberalisation
  • A start made to develop pension funds in some
    countries

4
Bad news Liquidity remains poor.
  • Why?
  • Short answer difficult policy dilemmas resolved
    in ways that impede bond market development

5
Consider 4 aspects
  • Fragmented issuance
  • Official smoothing of interest rate volatility
  • Lack of diversified investors
  • Lack of mark-to-market rules

6
I Fragmented issuance of public sector bonds
  • Fear of failure of one large issue
  • Nature of bonds
  • Different public sector bonds

7
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8
II Official smoothing of volatility
  • New or thin markets often exhibit an extreme
    volatility. - raises risk premium - risk of
    self-fulfilling expectations
  • Hard for private investors to manage because
    short-term interest rates very volatile
  • BUT
  • Government know best?
  • Private firms become addicted to government
    support

9
III Lack of diversified investors
  • Government pension funds are captive investors
    who hold to maturity need private funds
  • Mutual funds restrictedand focus on equities
  • Foreign investors scarceeven after deregulation

10
IV Lack of mark-to-market rules
  • Rationale discourage short-termism
  • Quid pro quo for captive market rules
  • BUT
  • Disguises balance sheet problems
  • Inhibits learning about risk management
  • Discourages trading

11
Challenges to banks as bond markets develop
  • In emerging markets, banks major holder of bonds

12
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13
Banks must
  • Imbibe an investment banking culture
  • Exploit possibilities of securitisation
  • Learn to manage interest rate risk

14
Conclusion
  • Many easy reforms accomplished think hard
    about dilemmas
  • An inward-looking or an outward-looking strategy?
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