Comparing the recent SunGard/PRMIA survey to the conversation on liquidity vs. transparency

In a recent survey released by SunGard Adaptiv and the Professional Risk Managers International Association (PRMIA) there was an interesting question on the impact of new capital requirements. The results are telling.

The question read: “The new regulations place additional capital requirements on certain business lines, especially in the OTC derivatives area. How is your institution responding to these demands?”

The synopsis of the results:

“…This is a new question in the PRMIA survey so there is no historical data for comparison. The answers suggest that risk managers fully acknowledge that extra capital requirements are a potential problem but the extent of these problems will vary depending on each bank’s line of business. More than half of respondents (58%) admitted that they are now more selective when undertaking capital-intensive business, the least committal of available responses, while almost a fifth of respondents said they would rather pass on extra capital costs to clients (18%). The most telling statistic, however, was that a quarter of respondents (25%) have exited these capital-intensive businesses altogether, which illustrates how much of a fundamental change regulation is having on the industry…”

Just last week in our SFM post “The debate between liquidity and transparency” we said  ”…Increased capital requirements have made market making less attractive to banks…” Now we have a better idea of how higher capital requirements are flowing down to business models. If 25% are exiting capital-intensive businesses altogether, that does not bode well for competition. The 58% who said they are now “more selective when undertaking capital-intensive business” could simply be not as far the learning curve as the 25%.

Will the liquidity simply disappear or flow to the less regulated shadow banking world? Neither are great results. Regulators are well aware of this, as evidenced by their push to deal with shadow banking. It will be interesting to see how this plays out.

A link to the survey results can be found here in the section “Industry Research.”

A link to the SFM post “The debate between liquidity and transparency” is here.

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