Bank’s Liquidity Lobbying is Self Serving – FT
June 17, 2015 \
4 Comments
Central banks and the International Monetary Fund have been worrying about falling liquidity for more than a year. Banks have come up with a neat explanation, and a fix: market making has been cut back because of tighter bank rules, so the obvious answer is to relax regulations. FULL ARTICLE
Comments
Years ago, dealers had many options to lay off risk and move inventory. These included the synthetic CDO market, prop desks, accrual books, CDS hedges, and negative basis hedges. Many of these risk mitigation outlets have been either reduced or removed from the dealer arsenal. Regulation has had a role in reducing some of these channels.
Reduction in balance sheet holdings/capital directed to providing secondary market liquidity, would seem to be a product of the changed environment, not the cause of the ‘liquidity crisis’. And those changes are both from a regulatory (not just increased capital costs but reporting, compliance mandates, etc….) and structural (huge growth of cash credit outstandings, larger buy side entities through internal growth and acquisition) perspective which have simply changed the economics for dealers which is why they have pulled back. Economics 101. If there was an appropriate ROI using the old model, balance sheets would be dramatically larger. Unlike Blockbuster that… Read more »
First, with all due respect to the FT and to James Mackintosh, all lobbying is self serving…’nuff said. Now, on to the point. The banks, and in this case I would have to assume that Mr. Mackintosh means the Investment Banks, are making the case that regulations are making it more difficult for them to take risk and provide the immediacy to the markets that their clients are accustomed to. There is truth in that and to dismiss it out of hand as lobbying to protect one’s self interest overly simplifies the problem. The frame of reference that ALMOST EVERYONE… Read more »
The business model of taking interest rate and credit risk as a broker/dealer/market-maker has been in decline alongside the dramatic increase in regulation, capital requirements, and the overall transparency that risk takers know exists when they commit capital. If it were an incredibly profitable business (secondary market-making in fixed income) new entrants would be lining up. Firms that more recently entered the markets as market-makers, prevalent in the rates space, have also seen the decline in ROI despite their enthusiasm to pick up the slack (and program/algo trade rates). Certainly higher capital requirements have dampened the appetite for previously acceptable… Read more »
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