Question

In Japan, large banks are often large lenders and large equity investors in the same firm. What are some of the potential conflicts that you see in these dual holdings.

Answer 1

When the bank are large lenders and large equity investors in the same company, some of the potential conflict in dual holding are as follows-

A. They will be putting various restrictive covenant which will be leading to lowering the probability of maximisation of value of shareholder.

B. Large Bank being lender will mean that they will not let the firm engage into a highly risky project because they fear losing out their money on investment.

C. When these large banks are providing loans to these organisation there will always be a biased approach of the banks because their investment are also embedded with the company.

D. The overall credit appraisal framework will also be liberal for the company and it will have a better credit worthiness than its original capability so it would be leading to a conflict of interest with the lenders.

E. When there will be an unfavourable economic situation, then also they will be getting easy restructuring of their loans in order to pay for the longer run so, the interest of bank as a lender is exploited.

Hence, both these position are contrasting positions and they will be leading to conflict of interest.