A Treasury official downplayed banking industry fears that new regulations could generate a bond market liquidity crisis in the future, saying that the financial system is safer now thanks to the post-crisis rules.
The 2010 Dodd-Frank law and related new rules have “without a doubt” made markets better prepared to weather a period of stress such as 2008’s housing crisis, Treasury counselor Antonio Weiss told lawmakers Thursday.
“I do think that what regulation has produced is a higher likelihood that the liquidity conditions that exist today will be available tomorrow in a period of stress,” Weiss said at a Senate Banking Committee hearing.
He made his comments in an exchange with Sen. Elizabeth Warren, D-Mass., a top congressional proponent of tighter regulations on Wall Street. The back-and-forth was particularly noteworthy because Warren successfully blocked Weiss from a Treasury post that would have required Senate confirmation, claiming that Weiss’ background as an investment banker disqualified him from a role supervising banks.
Weiss’ former industry has raised concerns about the effect of the new banking rules on liquidity in bond markets, which is the ability for firms to buy and sell bonds without causing big swings in the markets. The fear is that if firms cannot count on finding buyers for bonds during a moment of stress, they could run short on cash and create a panic.
Bankers such as JPMorgan Chase’s Jamie Dimon and investors like Blackstone CEO Steven Schwarzman have suggested that the rules have hampered big banks’ ability to act as brokers and dealers in the bond market, and that requirements for banks to hold certain amounts of liquid assets means that those same assets won’t be available for sale in a stressed environment when they’re needed. Schwarzman predicted in a highly cited opinion article that the rules would cause the next crisis.
Sen. Dean Heller, R-Nev., who gave voice to those fears at the hearing, called specifically to examine the question of liquidity.
“There are early warning signs that fixed-income markets are becoming more fragile and less liquid than they used to be,” Heller said. “My fear is that sometime in the future, there is a major period of stress in the markets that causes significant deterioration in liquidity.”
Both witnesses, however, were skeptical about that line of questioning.
“What you would worry about is the capital markets not performing well, not functioning the service they’re supposed to perform for borrowers and lenders,” Federal Reserve governor Jerome Powell said at one point. “And we don’t really see that. We see isolated examples of it, but the case is really not made.”
