Increasing regulations are clearly starting to squeeze large financial institutions. In a sign of the times, Euro megabank Credit Suisse announced on Thursday that it was planning to give up its role as a primary dealer to the European sovereign bond market.
The decision is another step in relatively new CEO Tidjane Thiam’s effort to revamp the bank’s trading and advisory services to keep costs down. The Swiss lender will withdraw from the U.K primary-dealer market as of Friday, the UK regulator reported.
Of note, this is the first time a gilt primary dealer (authorized to buy sovereign debt directly) has exited from the business since December 2011, when State Street European division threw in the towel.
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Big banks giving up on bond trading
Many large banks across the globe are shrinking or giving up their bond-trading activities given expensive regulations such as higher capital requirements many governments put in place over the last few years. These new regulations hinder the banks ability to manage inventory or warehouse risk with the result that prices are often more volatile for money managers and private investors looking to buy bonds.
Moreover, the situation in bond markets has clearly worsened over the last few years. The U.S. Treasury market has grown by over 45% in the last five years to $12.9 trillion, according to data compiled by Bloomberg. During that same period of time, the five biggest primary dealers have reduced their balance sheets by more than 50%, according to research firm Tabb Group LLC.
That said, Credit Suisse has decided to continue in its role as a primary dealer for the U.S. Treasuries market, Adam Bradbery, the bank’s London-based spokesman noted. He also pointed out that while Credit Suisse may still trade European bonds, it’s no longer committed to making markets for bonds.
Color on Credit Suisse exit from European bond markets by financial industry analysts
“This is a dramatic move for Credit Suisse, and a step back for bond-market liquidity,” Christopher Wheeler, an analyst at Atlantic Equities in London, explained. “This is probably designed to reduce costs and capital tied to its investment bank business. I hope it’s not a shape of things to come for the bond market.”
Soeren Moerch, head of fixed-income trading at Danske Bank AS in Copenhagen, noted: “The sum of regulations is strangulating the investment-banking industry. I expect more to follow Credit Suisse if this continues.”