New curbs for US banks that restrict their ability to trade with their own capital will hit liquidity and demand for eurozone government bond markets at a time when both are in short supply, bankers have warned as they prepare to lobby regulators to water down the rules.
The Volcker rules, passed as part of the Dodd-Frank reform package, will ban proprietary trading by all US banks starting in July 2012. Since the draft regulations came out last month, bankers have been warning that it would hit liquidity from equities to corporate bonds.
But eurozone sovereign bonds have raised particular concerns because US banks have historically played an important role in a market that has seen flows dry up because of worries over spiralling debt and the health of economies such as Italy.