NZ Debt Market
Why trade debt?
Hi Hemi
Sometimes organisations trade debt because they want the money now rather than some time in the future, for example if they didn't plan their cash flow well enough and need the cash now.
A main reason is to be able to lend more. Under Reserve Bank rules, banks can only lend up to an amount based on their capital. The more capital a bank has, the more it can lend. When it reaches the Reserve Bank's limit the bank cannot lend any more. The only way is to sell some existing lending to someone else, such as a fund manager. Of course, the bank will clip the ticket on the way through and get a share of the interest. But it has freed up some capital and can now lend some more.