BIS Survey: New Basel Rules May Make Trading and Market-Making More Difficult

A recent Bank for International Settlements (“BIS”) survey indicates that new regulations from the Basel Committee on Banking Supervision (“BCBS”) are set to increase costs of capital for government-bond dealers, potentially making trading and market-making more difficult, according to a recent Bloomberg article.

Respondents to the survey, which included 40 banks as part of a BIS study on fixed income market liquidity, expect this capital cost increase when moving from the initial Basel III rules to a fully phased-in Basel III.

According to the BIS study, “Market participants have raised concerns that regulatory reforms, by raising the costs of warehousing assets, have contributed to reducing market liquidity and could be keeping banks from acting as shock absorbers during periods of market stress.”

As SFIG previously reported, BCBS published its final rule relating to the fundamental review of the trading book. Banks are shrinking their bond-trading activities to comply with such rules. According to Bloomberg, these restrictions have reduced banks’ ability to build an inventory of securities that carry risk while monetary policy easing has added challenges for investors to buy or sell bonds without disrupting prices.

“One such challenge is scarcity effects, given that large-scale asset purchases reduce the amount of securities available for trading,” the study said. “A second challenge relates to the risk that valuations may have become predicated on unsustainable expectations of continued monetary policy accommodation.”

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