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THE ECONOMICS OF THE PRIVATE MARKET

Banks

Banks, which are information-intensive lenders, might also be expected to have interest in the types of securities offered in the private market.  However, for several reasons they seldom buy private placements. First, banks' liabilities are not long term and are not as well matched with private bonds on the asset side as they are with short-term, floating-rate loans. Of course, the swap market can be used to turn fixed-rate assets into floating-rate, but longer-term swaps are expensive.  Second, the looser covenants on private placements relative to bank loans may make some banks uncomfortable.

Bank purchases of private placements are subject to some regulatory restrictions, which are described in appendix C. Bank holding companies may purchase privately placed debt securities without restriction. Banks themselves may also purchase them but must place them in a loan account and follow traditional underwriting procedures. The latter requirement means that banks must evaluate and document the creditworthiness of the borrower as they would with any bank loan. As credit analysis is the norm in the private placement market, such evaluation and documentation do not appear to be onerous requirements. Some issuers attempt to create interest among banks and life insurance companies by constructing offerings that include both private bonds and loans, which are identical in their terms except for the classification of the instrument.

Other Investors

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