The global financial crisis caused a huge demand issue, however, currently with COVID-19, the industry is facing a supply problem, according to panellists at The Summit for Asset Managers (TSAM) in London.
One speaker said that amid the virus companies are not able to meet people’s needs, using hand sanitizer shortages, as an example.
“The central banks are not well-equipped to deal with that. There will always be risks with shortages in supply”, the panellist continued.
As a result of the challenges associated with the virus, the Bank of England today made a cut in interest rates, which will “provide liquidity and much-needed support for small and medium-sized enterprises”.
The Bank of England stated that its role “is to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary”.
Speaking on the panel yesterday, one participant observed: “Liquidity has been a main challenge for the industry over the past few years. I think part of the challenge for banks is the regulation that is imposed upon them; banks can't make markets in the way they used to. I think this is one of the unintended consequences of regulation – the constraints on banks.”
One speaker highlighted that “the buy side now holds 43 times the inventory of corporate bonds than the sell side. Only 3 percent of the corporate bonds will trade, so the amount of liquidity available to the banks is gone.”
“Liquidity is like a mirage, it evaporates as soon as you try to reach it. All of that risk and liquidity provision has effectively been moved to the buy side,” the speaker said.
Another panellist commented: “One of the myths that exploded in the past few years is that there is a price for anything, but there isn’t. After a crisis there is a dry up – nobody wants to buy anything. If there is no buyer, there is no market and no price.”
According to one speaker, some people want liquidity curves for every single asset over a number of years. “The concentration of risk is much higher on the buy side than it ever used to be,” they said.
Meanwhile, one speaker affirmed: “Asset classes always have been, and always will be, less liquid. Over the last 10 years, with rates kept relatively (some say artificially) low, the proportion for the overall yield is relatively higher, so does that make the asset class more valuable to the portfolio provider.”
“It is the proportion of the liquid assets that are important – and it is about how you define a liquid asset. As times become stressed as we have seen over the last few weeks, whether or not you’re getting enough of the pick up is very important. When you want it – liquidity isn’t there.”
Concluding the discussion, one speaker cited: “I think the mood of the market, in terms of governance, has changed since 2008, central banks have no interest in paying tax dollars in propping up failing financial institutions. Is there a balancing act to be had? Yes. Is there an easy answer/solution? No, probably not.”
