Ultra-low interest rates and reduced trading profits are taking their toll on the banks that play a pivotal role in Europe’s sovereign debt markets.
At the end of December, UBS withdrew as a “primary dealer” in the Irish debt market, a move that extends a deeper industry decline and leaves the €8.3tn EU market increasingly dependent on a shrinking band of intermediaries.
Primary dealers help governments raise money from investors by pricing and selling debt. The average number of such dealers in the EU fell to its lowest on record after four banks exited the business between January and November, according to Afme, the trade association. The number of primary dealers in 11 EU countries is now around the lowest since Afme began collecting data in 2006.
Many European banks are reassessing these divisions after years of poor performance and meagre returns. Among critical factors identified by Afme: low levels of new supply and investors’ tendency to hang onto their bonds rather than trade them. Issuance of bonds and bills by euro-area governments declined from €1.4tn in the first half of 2009 to €1tn in the first half of 2019.
The European Central Bank’s €2.6tn quantitative easing programme has also meant national central banks mopped up large volumes of debt. Ireland fell from 16 dealers to 15, in line with the EU average.
But other countries have seen falls too, since the financial crisis. The Italian sovereign debt market has 16 primary dealers, down one-third since May 2006.