INVESTMENT banks will struggle to help real economy firms access finance because of tougher rules on capital, the Bank of England’s Dame Clara Furse warned yesterday.
Politicians and regulators want businesses to access finance from a range of sources including capital markets, reducing their reliance on bank loans. But that relies in part on investment banks market making – that is, trading bonds.
Losses in the financial crisis, combined with rules pushing up the cost of market making have reduced investment banks’ exposure to the market – reducing liquidity and so harming businesses raising funds, Furse said.
“Proprietary trading has also largely disappeared from major investment banks’ American and European operations – mainly as a result of regulation designed to protect bank depositors from the potential for losses, in extremis, arising from the existence of these trading books,” she said.
“While regulatory reform was clearly needed, the decline in proprietary trading also reduces the depth and diversity of capital markets.”