Trading book review prompts liquidity concerns

Author: Edward Price | Published: 27 Jan 2016

The Basel Committee on Banking Supervision's (BCBS) latest framework for the Fundamental Review of the Trading Book has failed to allay the concerns of US counsel about a potential negative impact on market liquidity.

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

Nonetheless, banks’ total risk-weighted assets will now see a weight of around ten percent placed on trading book assets, as of 2019, up from about six percent.

One likely result is reduced trading activity by banks and subsequent concerns over market liquidity.

Richard Farley
Paul Hastings

“Whenever there are fewer market-makers, there’s less liquidity,” said Richard Farley, partner at Paul Hastings.

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