(Bloomberg Gadfly) — It’s almost antiquated that newly minted regulators are ramping up their bond-market liquidity worries now.
Traders already spent years fretting about a logjam in debt markets, back in 2013, 2014 and 2015. But many people have tired of thinking about it, especially because trading volumes have generally been increasing and Wall Street firms are profiting.
Now, however, the Financial Stability Oversight Council is reviving the issue just as President Donald Trump’s Treasury secretary, Steven Mnuchin, gets his bearings. This watchdog group is studying whether post-crisis regulations are causing financial instability rather than preventing it, namely by diminishing the extent to which Wall Street banks can facilitate debt trading, according to a Bloomberg News article by Jesse Hamilton and Ben Bain. In February, Trump’s chief economic adviser, former Goldman Sachs Chief Operating Officer Gary Cohn, raised similar concerns.
The crux of the issue is that post-crisis regulations forced big banks to reduce the amount of riskier assets they held. That included those held for proprietary trading as well as those used to make markets by buying large chunks of debt from clients and then slowly selling them over time. By many accounts, this has made it more difficult for investors to trade different types of dollar-denominated debt in large pieces quickly and without moving markets.
Regardless of how substantial bond-market liquidity threats are to financial stability, this study is years too late. At this point, banks and investors have generally adapted to the current environment. To the extent traders are still concerned, they hold more cash, use derivatives, turn to electronic-trading systems or plan to hold assets for longer. To the extent banks lament the fat profits of yore, they’ve jettisoned traders accustomed to multimillion-dollar bonuses and changed the way they do business to match buyers and sellers.