Many banks such as Barclays have a long history providing liquidity to markets, in particular the credit markets. It was a key component of their business. But as being a mega bank has been losing its luster lately, so, too, have the balance sheet benefits of providing liquidity diminished. In a report that uses the hashtag #LiquiditySqueeze in the ominously worded title “The Pre-crisis Perspective,” the bank report warns that limiting banks involvement in cash credit markets has reduced liquidity. Furthermore, the report pointed to an increase in trading costs as Dodd-Frank has pushed banks out of the role of market maker.

barclays-9-9-bid-ask-1 Credit Markets

Trading liquidity in credit markets has deteriorated since bank dealers out of market

Trading liquidity in credit markets has “deteriorated,” an independent report from Barclays noted. Dealers, many of them banks, have been withdrawing from the market is a result of Dodd-Frank, which is “keeping the liquidity environment challenged.”

This new market environment has resulted is a decline in turnover and a shift to lower bid / ask trades to mitigate transaction costs, Barclays Credit Research analysts Jeffrey Meli and Shobhit Gupta stated in a September 8 report. From the Barclays standpoint this “reduced portfolio flexibility and certainty of execution.”

Deutsche Bank had documented a similar situation earlier in the year.


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