Brainard Says Rules Probably Have a Role in Liquidity Volatility

Financial regulations are likely having some impact on liquidity in markets though it remains difficult to reach “hard and fast conclusions,” Federal Reserve Governor Lael Brainard said on Thursday.

“Is regulation playing a role?” Brainard said during a question-and-answer session at a conference marking the fifth anniversary of the Dodd-Frank Act. “I would guess that it is.”

Volatility is also being affected by changes in trading activity that predate the 2008 financial crisis, she said.

“We see a much greater role played by electronic trading, in particular by high-frequency traders,” Brainard said. “Their trading patterns are different. And as they take a preponderance of the trading activity in some markets, that no doubt also may change the patterns of liquidity resilience.”

Brainard’s comments came a day after U.S. Treasury Secretary Jacob J. Lew rebutted claims that new rules have triggered volatility in bond markets, including last October when Treasury yields fluctuated wildly.

Regulators will release a study soon that shows the events of Oct. 15, 2014, weren’t tied to Dodd-Frank rules, Lew said. Yields on 10-year Treasuries plunged the most since 2009 that day, prompting traders to question whether new regulations had hurt liquidity.

On other regulatory issues, Brainard said “it will be important to assess” whether to include a capital surcharge on banks in the Fed’s annual tests of banks’ ability to withstand an economic shock. The central bank said last year when it proposed requiring the largest U.S. lenders to maintain additional capital buffers that it would analyze whether such a surcharge should be made part of the stress tests.

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