FED’S BRAINARD: Regulation may hurt bond market liquidity — but it’s preventing something much worse

In a speech Monday, Federal Reserve Governor Lael Brainard admitted there is a liquidity issue in the bond market and that regulation may be a part of the problem. But, she argued, this regulation is also preventing another 2008-style banking collapse. Which is simply more important. The issue of bond market liquidity has been a consistent theme over the past years or so with financial executives such as JP Morgan CEO Jamie Dimon, Blackstone CEO Steve Schwarzman, and Oaktree Capital’s Howard Marks weighing in on the issue and generally pointing the finger at a lack of liquidity exasperating moves in financial markets. Some of the blame has been pointed at federal regulations that force banks to have more cash on hand. Brainard recognized that there are some liquidity strains, especially in the high-yield bond market, but these are worth the increased security offered by banks’ holding fewer risky assets. “While acknowledging the role of regulation as a possible contributor, it is important to recognize that this regulation was designed to reduce the concentration of liquidity risk on the balance sheets of the large, interconnected banking organizations that proved to be a major amplifier of financial instability at the height of… Read full this story

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