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November 02, 2011
Lending for the purpose of capital injection...
Is it wrong for a Bank or a Financial Institution to lend to certain entities (X) which then invest those money in that Bank/FI equity? And what if the entity X is the government?
Well that's what Dexia did recently. And that's also what happens to some extent when banks are mandated to invest in government bonds (as in India and in some other countries) when accompanied by capital infusions from the government.
Now, is this okay? This is something that's been occupying my mind for a few days...
And here's my take : It's okay if it's done from a relatively small amount of the deposits of that bank & X is government. Again this seems a compelling argument when this is required for improving financial stability. But, when the amount lent is substantial then depositor's approval ought to be taken. Furthermore, when X is not government then it looks a fraud---clearly the depositors are being taken for a ride!
WHAT DO YOU THINK?
Posted by amgodbole at November 2, 2011 03:08 PM
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