All eyes on RBC after euro govvie exit

Fri Aug 9, 2013 12:56pm EDT
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* Regulatory pressures squeeze sovereign bond trading

* RBC tests new supra and agency-focused strategy

* Rivals question ability of bank to hold on to key clients

By John Geddie and Christopher Whittall

LONDON, Aug 9 (IFR) - More banks could be poised to follow RBC and exit unprofitable European government market-making, removing a valuable source of liquidity in these markets and potentially hiking borrowing costs for some sovereigns.

Banks' sovereign businesses are buckling under the weight of a regulatory squeeze on trading book capital and the prohibitive costs associated with primary dealerships.

The Canadian bank unexpectedly culled its European government coverage in late July, and could well be a trailblazer for others looking to maximise profits if it can continue to win mandates with its remaining supranational and agency clients.

"It's possible other banks will exit government bond trading. The return on equity on this business is very challenging right now because of the capital requirements on trading books and other regulatory developments, not to mention other costs associated with being a primary dealer," said Elie El Hayek, global head of interest rate trading at HSBC.

"We've already seen that starting in smaller countries where banks will exit first, reducing the liquidity of their bond markets and increasing their funding costs."   Continued...