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World's biggest wealth fund speaks out on liquidity banks miss

[OSLO] As some of the world's best-known investment banks blame tougher capital rules for contributing to the lack of liquidity in financial markets, the world's biggest sovereign wealth fund has a different take.

The argument is "an excuse for something else," Oeyvind Schanke, chief investment officer of asset strategies at Norway's US$790 billion fund, said in an interview in Oslo on Tuesday.

One week after bank executives met in Davos, Switzerland, where they spent some time discussing the fallout of stricter financial requirements, Norway's wealth fund is questioning a tendency to blame regulators.

"New regulations have reduced volume on a normal day because you don't have that type of market-making activity from the investment banks and other large players," Schanke said.

"But in times of big movements they wouldn't be there anyway. 2008 is a perfect example. You didn't have any tough regulation in 2008, but somehow the fixed-income market froze up - which you would have expected because this type of activity is to facilitate normal trading days."

"Obviously they are used to making money on this activity and now they can't make money anymore," he said. "They're trying to find reasons for what's going on."

Concerns that markets face a liquidity crunch are growing as the world's biggest investment banks retreat from capital- intensive fixed income, currency and commodities trading to meet tougher regulatory demands. Liquidity has been affected by banks committing less capital. But the same regulations that are contributing to that have made the world of finance much safer, according to Schanke. "You can't have it all."

Goldman Sachs Group Inc President Gary Cohn said last week that China is suffering from a lack of liquidity in markets. Asia's largest economy is going through structural changes "in an era where we just got through re-regulating all of the financial institutions around the world and we've taken an enormous amount of liquidity out of the markets," he said during a panel debate in Davos.

The comments echo concerns raised by other finance industry executives and policy makers, including Blackstone Group LP CEO Steve Schwarzman, who said last week that in times of stress, fixed-income markets have "huge gaps" where dealers are no longer able to facilitate bids, resulting in "huge losses." Schwarzman went as far as to say that "regulation has made the world more dangerous" on certain levels.

Schanke's says that it's not the role of the regulator "to keep up liquidity. It's the role of the regulator to have an environment that doesn't hinder liquidity."