Banks have debt owed by debtors of the bank as well as debt the bank owes as a business entity. Debtors owe banks for debts such as car loans and mortgages. Banks can finance operations expense through common stock called equity, which is not debt, or through corporate bonds that are bank debt.
Bank Corporate Bonds
Corporate bonds are bank debt used to raise money for operations or specific projects. Corporate bonds issued by a bank differ from government bonds; the bondholder assumes additional risk because the bonds have no backing from the United States government. The risk depends on the credit-worthiness of the bank issuing the bonds. Because bank corporate bonds do not have government backing, they tend to pay higher interest then government bonds to compensate for the higher risk.
Bank Debt Ratings
Several services monitor the credit-worthiness of bank debt. Standard & Poor’s, Moody’s and Fitch are companies that provide regular reports on bank debt ratings. When a bank is in trouble, the monitoring companies will lower the credit rating of the bank, which indicates that bank will have difficulty repaying its debt. Higher credit ratings are an indicator that the bank is able to repay its debt without problem.
Banks all have portfolios of debt owed the bank from debtor customers. Bank debt portfolios make up a large part of bank assets, and careful monitoring of how consumer debt is repaid occurs. Banks that have large write-offs due to customers not repaying debt become troubled banks, since the bank loses profitability when consumer debt is not repaid.
Information regarding bank debt portfolios and bank-issued bond debt is available in the quarterly and annual reports of the bank. These reports are available to the public and may be found on the investor relations portion of any publicly traded bank website.