A new study released by PwC, commissioned by the Global Financial Markets Association and the Institute of International Finance (two lobby groups for international finance), claims that post-crash regulations need to be revisited by lawmakers, due to the negative affects they have had on financial markets.
The study also suggests that there has been a measurable decline in the trading capacity
of banks
The report claims that “market evidence points to a measurable reduction in financial market liquidity,” pointing out that the volume of European corporate bond trades has declined by 45 percent between 2010 and 2015. Likewise, large trades are said to be increasingly hard to execute without affecting price. The study also suggests that there has been a measurable decline in the trading capacity of banks: “banks’ holdings of trading assets have decreased by more than 40 percent between 2008 and 2015, and dealer inventories of corporate bonds in the US have declined by almost 60 percent over the same period.”
This reduced liquidity, PwC notes, is a result of many factors – however, it singles out “banks de-risking in the wake of the crisis (selectively de-leveraging and unwinding large non-performing and capital-intensive credit books), following the introduction of new regulatory risk frameworks,” as one particular factor.
The regime of tougher regulations following the 2008 crash is claimed to be “presenting challenges for banks’ traditional role as market makers.” The new regulation are, the report claims, affecting “the ability of bank dealers to facilitate liquidity and the redistribution of risk in times of volatility, potentially introducing new and unforeseen risks to our markets and economy.”
PwC concludes that “there are grounds for a review of the calibration of the reforms to date and the ongoing regulatory agenda, in order to properly understand and consider the effects of regulatory initiatives on market liquidity by asset class, and to consider whether upcoming regulatory initiatives could likely exacerbate the trends in liquidity.”
