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By Patrick Graham and John Geddie
LONDON, June 24 Banks are being squeezed by increased regulation and lower margins to the point of giving up previously profitable primary dealerships in Europe's biggest government bond markets, a senior official at French bank BNP Paribas said on Tuesday.
Primary dealers are one of the building blocks of government debt markets, used by debt managers as a sales conduit to funnel in bids from thousands of funds and other institutional investors.
But a primary dealership also comes with substantial costs and obligations for each bank and, along with many other chunks of banks' markets operations, has been squeezed by an era of ultra-low interest rates, greater regulation and lower trading volumes.
"The fundamental economics of the business have become challenged," Martin Egan, global head of primary markets and origination at BNP Paribas told a panel at a Euromoney bond market conference in London.
"Longer term, you will see fewer banks involved in euro zone government primary dealerships."
Last summer, Royal Bank of Canada shut down its European government bond business after just three years of operation. Others, such as Swiss bank UBS have withdrawn from certain dealerships, citing regulatory pressures.
While Egan says BNP Paribas is committed to its dealerships, he said other banks were struggling to maintain the infrastructure to make markets, and are faced with stricter compliance and higher capital costs for holding inventory and transacting derivatives.
"Certain banks will stay in and get better and serve their clients well but others won't," he said, suggesting that the number of dealerships, typically 10-15 most markets, would be trimmed. "For me 10 is around the right number to get good liquid markets and an appropriate revenue pool."
He said the withdrawal of some banks would mean governments could lose liquidity in their markets and face higher funding costs. Sovereign debt managers appearing on the same panel did not seem overly concerned.
"Banks must make a profit and loss calculation, if they make a small loss they must decide if it is worth it," said Niek Nahuis, the head of the Dutch State Treasury Agency.
Maya Atig, deputy chief executive at the Agence France Tresor, said: "It is still an attractive business, each primary dealer tends to develop his own model and this model can change from one year to another."
"It induces us to have a more direct relationship with investors and adapt to the fact that they will be more cautious at auctions." (Reporting by John Geddie and Patrick Graham; Editing by Robin Pomeroy)