Regulation made banks better - but there are downsides

Bank image

Three heads of the world’s largest banks were delivering the same message as if in unison on the opening day of the World Economic Forum Annual Meeting. They were nearly reiterating each other’s exact words as they repeatedly pointed out that regulations were stifling liquidity in the markets.

However, they were quick to make it clear that they weren’t criticising regulations, in fact, they acknowledged the need for it following the easy money years that led up to the financial crisis.

"The bulk of regulatory reform was much needed," said Anshu Jain, the co-chief of Deutsche Bank, at the World Economic Forum's annual meeting.

"Did banks have enough capital for the risk they were carrying? No, I would say not," he added.

Despite the need for regulation, the chiefs from Bank of America, Deutsche Bank and HSBC acted in harmony to send a strong message to those attending the forum, highlighting that tighter capital regulation has forced banks to reduce their inventories, leading to reduced liquidities - especially in bond markets.

“We can’t provide as much [liquidity] as we did before by the nature of the rules,” said Brian Moynihan, chief executive officer of Bank of America Merrill Lynch.

The same analogy was even used by two of the chiefs - Douglas Flint (HSBC) and Anshu Jain (Deutsche Bank) - both stating that banks could no longer perform as shock absorbers for large market moves like in times past, as “very lean inventories” impairs their “ability to provide that shock absorption”.

These statements come while much of the financial industry is still hurting from the aftermath of the Swiss National Bank’s decision to end the coupling of its franc to the euro, which sent currency rates swinging in the wind. Many institutions lost millions of dollars and some were even forced into insolvency, with Deutsche Bank recording losses around $150 million, according to the Wall Street Journal.

As liquidity continues to dry up in credit markets, it may increase the wild swings seen in markets and is “top of my worry list”, according Mr Jain. However, he assured listeners that it was his “fear” and not his “prediction”.