Felicia Grumet, a managing director at Bank of America Merrill Lynch, said that capital rules were making some banks question the feasibility of being in certain markets.
But Grumet said it isn’t just that market making isn’t profitable, but rather it is the sheer amount of overlapping regulation that is beginning to put banks off playing in certain markets.
“It’s not just the numbers [that are forcing banks to question their roles in the capital markets], it’s all of the different regulations, the complexity and in some cases the lack of clarity,” she said. “What trading desks can do and what products they make markets in is influenced by the Volcker regulation as well as Basel regulations.”
A number of large financial institutions have made headlines over the past year through significant cuts in their trading desks.
For many that have been designated as Globally Systemically Important Banks (G-SIBs), this is primarily because of the expensive capital charges that are applied to securitized assets.
But it is not just the G-SIBs that have to worry about capital charges. A number of different regulations, when applied in unison, tack on huge capital charges to securitized assets that will significantly drain market liquidity.
Panellists added that securitizations seem to have been punished by regulators more than the underlying assets that back them, and it was getting to the stage where it was no longer viable for large institutions to act as market intermediaries.
“I would highlight that the complexity and the uncertainty tends to lend itself to dealers being either more cautious, or not willing to potentially make markets in certain assets when they know that returns are not sufficient to justify those trading activities,” Grumet added.
The panel discussed whether regulators had intended regulation to be so punitive. They added that it was the job of the market to educate lawmakers on how liquidity was being affected by regulations before they are all fully implemented.
However, some in the market are not so convinced that the current liquidity crisis is an unintended consequence of regulation.
Sources told GlobalCapital before the conference that it has always been the intention of regulators to move banks out of areas that are deemed too risky and that because of these new regulations the financial system may be unrecognisable by the end of the decade.