Trading Book Review prompts liquidity concerns

Author: Edward Price | Published: 25 Jan 2016

The Basel Committee on Banking Supervision (BCBS) has released its framework for the Fundamental Review of the Trading Book (FRTB). Counsel and industry in the US are concerned about a potentially negative impact on market liquidity.

In a sign of compromise with industry, and policymakers concerned about growth, the BCBS has watered down its initial proposals for raising capital requirements in its framework, released on January 14. 

Nonetheless, increased weight will be placed on trading book assets, as of 2019, in the calculation of banks’ total risk-weighted assets. One likely result is reduced trading activity by banks. That potentially leads in a straight line to concerns over market liquidity. "Whenever there are fewer market-makers, there’s less liquidity," said Richard Farley, partner at Paul Hastings.

Richard Farley
Paul Hastings
In a joint press release, three industry groups expressed similar logic on liquidity. The Global Financial Markets Association (GFMA), Institute of...