deni wrote:MEZZANINE wrote:@ Deni, you say banks have to buy government bonds, not true. Banks have to hold capital and prefer to hold governments Bonds ( which the law allows them to call capital ) at low interest income than hold cash reserves earning no interest.
Cash reserves earn at least the EONIA/SONIA/USONFFE/... and can be liquidated overnight. Bonds earn more, but they bind liquidity long term. Considering liquidity cost (and not even credit spread risk), you might realize that banks do not "earn" that much by holding government bonds.
Further, bonds are NO capital. You will find the "capital" on the right hand side of a balance sheet. Bonds are
assets and as such, they belong on the left hand side. Bonds are thus as much "capital" as the mortage your house bank gave you. You can look up your basic accounting text book
What makes governement bonds different from your mortage loan, is that their risk weight is zero thus holding governement bonds does not cost you (tier 1)capital (and yes, thats the most costly one).
Your mortage on the other side, has a risk weight of 100%, meaning that for every 100 € of it, a bank has to hold 8 € of capital and can finance the other 92% through taking debt itself.
And guess what, the debt the bank takes is covered by what? Right, government bonds!
The calculation is simple: covered debt is cheaper than uncovered one, means less re-financing cost, less re-financing cost means cheaper interest rates for the mortage you take.
Simple, isn't it?
In the end, by setting the risk weight of government bonds to 0 procent, the regulator and thus the law, are forcing banks to buy governemnt bonds in order to provide coverage for their own debt without contracting their lending business and thus avoiding a credit-crunch and whatever comes from it
Well I'm not expert on this subject ( or any other lol ), Im not in the banking industry and Im not a qualified accountant, but I am AAT ( Association of Accounting Technicians ) qualified and I do work as a Treasury Officer dealing with mortgages, cashflows and investments for a Social Housing Charity so I do know a bit about finance.
Government bonds are not something I have first hand experience and as you say technically the the governments that issued the bonds are debtors and should appear on that side of the balance sheet, BUT as I understand it the way that bonds differ from loans is that they are also considered as having a guaranteed monetary value ( whereas debtors are only potential or projected income ), Government Bonds can be considered a kind of international promissory note so can be used as currency, and thus can be considered as Financial capital, or used as assets/security to borrow against.
IMO this is wrong for several reasons
1) Bonds are in the currency of the Government that issues them, if the currency losses value then the bonds are worth less so they are NOT secure.
2) If a country defaults on interest payments then no-one will buy the bonds at face value so the trade value can drop.
3) If the bonds international value drops and the bank holding them has used the bonds as assets/security for loans, then those loans are no longer secure, therefor if the banks other debors default the bank could fail to make it's own repayments and become insolvent itself.
Back to the original point I made, you said banks 'HAVE' to buy Government Bonds, I maintain they do NOT have to, they choose to, they have the option to buy other secure assets or hold cash reserves but they choose to buy bonds on the false premise that they are a safe investment or way of holding capital in a secure way.