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Bank Regulation Shifts Risk Instead of Reducing It, Nordea Says

Efforts to regulate financial markets will transfer risk to investors from banks instead of reducing it, Nordea Bank AB (NDA) said.

“The credit risk on counterparties becomes liquidity risk through central counterparties and collateral demands,” Nordea’s Helsinki-based Head of Research Aki Kangasharju and Analyst Suvi Kosonen said in a report today. “Central counterparties may become too big to fail.”

Europe’s bank regulation is being tightened in the aftermath of the global credit crunch to shatter the link between banks and sovereigns that worsened the euro-area debt crisis. Banks will have to amass more capital and match lending with the funds raised on the market to ensure they can sustain losses.

The liquidity on investment grade bonds will decline, because they’ll be used as collateral for derivatives trading at central counterparties and acquired for use as banks’ risk buffers, according to Nordea. The lower liquidity will augment market volatility and risk, the lender said.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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