Assuming equivalent risk tolerance among banks, for any given borrower the provider of funds with the best information will be able to offer the lowest cost for the borrowing, and because it has the better quality borrowers, will be able to offer depositors the best return. Capital markets have reduced the cost of information Perhaps most significantly, rating agencies have identified and capitalised on investors' willingness to rely on a security's published rating. And in the case of publicly rated debt securities, such margins have disappeared altogether for a large proportion of borrowers. Although the cost of compliance with such a regime is not insignificant, for larger offerings these costs are less than those faced by regulated depositary institutions. Disclosure requirements in capital markets are set at a minimum level of safety for the market as a whole.
Investors signal their preference for more information through the price they are willing to pay.
Investors seeking greater returns generally are willing to accept more risk and less information beyond the prescribed minimum. In contrast, bank information requirements will reflect the aggregate risk tolerance of the bank's regulators, shareholders and depositors. For borrowers able to access capital markets directly, the cost of capital will be reduced according to the confidence that the investor has in the relevance and accuracy of the provided information. As the supply of Crown-issued debt securities reduces in New Zealand, there is increasing demand from investors for high quality, low risk securities from other issuers. Securitisation can help meet this demand.