* Britain still has 21 primary dealers left
* Decision was a commercial one, DMO says
* Banks across Europe reconsidering relationships
By Tim Castle and Douwe Miedema
LONDON, Dec 14 (Reuters) - State Street Bank Europe has resigned as a participant in British government bond auctions, the Debt Management Office said, as banks find it less attractive to take part.
While the number of banks taking part in government bond auctions has risen sharply across Europe in the past few years, many are now rethinking the increasing risk as politicians struggle to put an end to the euro zone debt crisis.
“Overnight, State Street Bank in Boston has announced its withdrawal from various global cash bond trading activities, which includes UK government bonds,” the DMO said on Wednesday.
Banks designated as a primary dealer -- known as a gilt-edged market maker (GEMM) in Britain -- commit to buying a certain percentage of government-issued bonds in return for a guaranteed chance to participate in the auction.
It was once a coveted position and banks often subsidised bond sales in the hope it would curry favour with governments, leading to lucrative business, such as state privatisations.
But scarce capital means banks are less willing to take on the increasing risk of being left with unsold bonds, and many in the market expect a shake-out in the overcrowded market.
State Street was not available to comment.
“It was a commercial decision taken at the highest level in Boston. It is not got anything to do with their performance as a gilt-edged market maker. They have taken a decision to withdraw from cash bond trading globally,” said a DMO spokesman.
State Street has been keen in recent years to boost revenue in areas traditionally dominated by investment banks, such as market-making and execution.
Its withdrawal marks a refocus on its core business of providing custody and fund administration to its brokerage, fund management and hedge fund clients.
Sovereign bond auctions have seen a sharp rise in number of banks taking part. A small country like Austria, for instance, has primary dealer relationships with 24 banks, and several banks have mandates from more than 10 countries.
Britain will have 21 banks left in its government bond auctions, the DMO said, compared with 15 two years ago.
If more banks walk away, the loss of guaranteed buyers will likely boost costs for cash-strapped countries in Europe, making life more difficult just as they plan to issue 800 billion euros ($1 trillion) of debt next year alone.
Many primary dealers are taking measures to mitigate risk from holding sovereign bonds, such as short selling bonds ahead of an auction and asking for stronger guarantees, which can drive up costs for governments.