Diamond, Cohn Say Liquidity-Sapping Rules Add Turmoil

  • Former Barclays CEO says capital rules prevent market making
  • Goldman Sachs president sees liquidity hurting China turmoil

Violent swings in global markets fretting over the Chinese economy are being exacerbated by tougher capital rules imposed on the world’s biggest banks, according to former Barclays Plc Chief Executive Officer Bob Diamond and Goldman Sachs Group Inc. President Gary Cohn.

“Now we have more volatility, and we’re surprised at this?,” Diamond, 64, who is now CEO of Atlas Merchant Capital LLC, told Bloomberg Television’s Erik Schatzker and David Westin in an interview from Davos, Switzerland. Investment banks aren’t committing as much capital to making markets, leading to lower levels of liquidity, and that has “impacted the speed and the depth” of whipsawing markets, he said.

Concerns there will be a liquidity crunch are growing as the world’s biggest investment banks retreat from capital-intensive fixed income, currency and commodities trading to meet tougher regulatory demands. Investors fear a rush to exit certain assets could spiral out of control without enough buyers and sellers in the market.

Structural Changes

“The Chinese are suffering from this lack of liquidity,” said Cohn, 55, speaking on a panel in Davos on Thursday about the future of the Chinese economy. Asia’s largest economy is going through structural changes “in an era where we just got through re-regulating all of the financial institutions around the world and we’ve taken an enormous amount of liquidity out of the markets.”

Regulations such as the Financial Stability Board’s capital requirements for global systemically important financial institutions and the U.S. Dodd-Frank Act’s Volcker Rule that limits federally insured banks from speculating on some assets, including corporate debt, have cut liquidity in markets, according to Diamond.

Their comments echo the concerns of other senior finance industry executives and policy makers attending the annual World Economic Forum this year.

Blackstone Group LP CEO Steve Schwarzman said on Thursday that, in times of stress, fixed-income markets have “huge gaps” where dealers are no longer able to facilitate bids, resulting in “huge losses. That’s down to the impact of regulation, he said.

Credit Suisse Group AG CEO Tidjane Thiam said on Friday that a dearth of liquidity has made it difficult for investors to unwind positions amid the violent swings in markets. Speaking in an interview with Francine Lacqua from Davos, he said market participants are “very worried” about plunging oil prices, though the global banking system has improved its resilience since the financial crisis and is in a “much better place” to withstand shocks.

“One worry you don’t have this year is that the banking system may blow up,” Thiam said.

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