Bank Rules Shift 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 said.

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

Europe is trying to break the link between banks and sovereigns after their interdependence exacerbated the region’s debt crisis. The new rules mean banks will have to amass more capital and match lending with funds raised on the market to help them withstand losses.

The liquidity in investment-grade bonds will decline, because the securities will increasingly be used as collateral for derivatives trading and to help build risk buffers, according to Nordea. The lost liquidity will add to market volatility and risk, the bank said.

Regulation will hurt economic growth as banks raise loan margins and reduce investments to counter rising costs and eroding profit. That will cause households to reduce consumption and encourage saving, Nordea said. The spread between short and long interest rates will widen, the bank said.

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