So the bank gather a significant amount of capital from the investor, that’s why the investor take significant risk because when the bad things happens during the economic crisis for example, the companies, some of the companies get default and that’s why the bank loses its assets because when the bank provides a loan to the company and the company defaults, the bank loses its assets or also loses its equity. So that’s why the equity is one of the capital that requires the highest cost of capital because the investor requires high off return because of the risk that I just mentioned. And when the time during the bad economic situations, the equity collapsed to cover the loss of the banks. And at the same time, they tried to complain to the regulators in the terms of of the bank should provide high quality capital, which is the equity from the investor and also the bond. But the bond is the cheapest way to get the capital because the bond, for example, like the bond only needs 7 or 8% per annual compared to the cost of the capital from the investor, which is the requires 9% per annual that banks should repay to the investor. So that’s why bond is the cheapest way. But at the same time, the bank cannot gather or issuing the bond always and always because they need to comply with the regulatory environments. So the bank tried to figure out how the perfect balance between gather the equity from the investor and then issuing the bond to the market.
Band 6+: Why do you think banks should be required to hold a significant amount of capital, even though holding more capital can reduce their profitability?
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So the bank gathers a significant amount of capital from investors, which is why investors take significant risk because when bad things happen during an economic crisis, for example, some companies default, and that's why the bank loses its assets because when the bank provides a loan to a company and the company defaults, the bank loses its assets or also loses its equity. So that's why equity is one of the capital that requires the highest cost of capital because the investor requires a high return because of the risk that I just mentioned. And during bad economic situations, the equity collapses to cover the losses of the banks. And at the same time, they try to complain to the regulators in terms of the bank should provide high-quality capital, which is the equity from the investor and also the bond. But the bond is the cheapest way to get the capital because the bond, for example, only needs 7 or 8% per annum compared to the cost of capital from the investor, which requires 9% per annum that banks should repay to the investor. So that's why the bond is the cheapest way. But at the same time, the bank cannot gather or issue bonds always and always because they need to comply with the regulatory environment. So the bank tries to figure out the perfect balance between gathering equity from the investor and issuing bonds to the market.
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Speaking Time: 96 seconds