A Canadian bank pulling
out as a primary dealer in the bonds of five core European
governments might on the face of it say more about the bank
than it does about the state of primary dealers.
But it would be foolish
to see it that way alone.
Indeed, RBC Capital
Markets decision last month to effectively shut down its
European government bond business by pulling out of its primary
dealerships in Belgium, France, Germany, the Netherlands and
Spain should be seen as a warning.
For years, running
primary dealerships has been an expensive business and it is
increasingly so in light of new capital requirements, fuelling
expectations that those banks that do not have critical mass
will start pulling out. RBC might be the first of many.
Ask any global markets
head at any investment bank and most will likely say in private
that they have considered or are considering the future of
their primary dealerships
in the eurozone.
As one markets chief told
Euromoney earlier this year: "Were all asking ourselves:
do I really want to blow my brains out in
Although bankers always
argue that there are ancillary benefits to being a primary
dealer, such as the market insight gleaned from flow trading,
the dwindling amount of profitable derivatives business and
fee-paying bond syndications from governments have forced
senior management to reconsider their commitment.
The significance is not
that RBC has itself pulled out after three years of concerted
efforts to gain market share, but rather that its decision
might be seen as validation for others to follow suit.
Being the first to close a business is hard; those that
follow will undoubtedly find it easier.