Thursday, March 24, 2016

Why Are Big Banks Offering Less Liquidity To Bond Markets?

Forbes asks Why Big Banks Offering Less Liquidity To Bond Markets? and finds that this is the result of the need to put aside the same capital for repo as for another other assets.

 "The “rent” for the balance sheet space associated with a given trade is the cost to bank shareholders when bringing the trade onto the bank’s balance sheet, above and beyond the mark-to-market profit on the trade. The main source of this cost is “debt overhang.” When a bank finances the purchase of an asset, it effectively transfers some of the value of the asset to its legacy creditors, who now have more backing for their debt claims. Similarly, when a bank issues equity in order to meet a higher regulatory capital requirement for a new position, thus making its balance sheet safer, creditors benefit from a transfer of wealth through the increased safety of their claim. For a trade to be viable, its mark-to-market profit must exceed the associated wealth transfer to creditors. Debt overhang is smaller for more highly capitalized banks, giving them an important advantage in competing for trades."

The profit required for the capital employed makes market less attractive for banks and increased the cost of funds (even when colleralised).

'via Blog this'

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