The big banks want to create so-called regulatory capital trades for smaller lenders as they expect demand for these kinds of securitisation structures will rise ahead of regulations designed to provide more stability in the financial system.
Such trades, also known as synthetic securitisations, involve repackaging loans on a bank’s balance sheet, then slicing them up into different tranches. Then the bank typically buys protection on the riskiest or mid-level tranche from an outside investor such as a hedge fund, insurance company or private equity firm. Doing so allows a bank to reduce the amount of regulatory capital it has to hold against the loans – a tempting prospect as banking groups are forced to hold more capital ahead of new regulation such as the forthcoming Basel III rules.
Some of the biggest global and European banks, including Barclays and Standard Chartered, are known to have recently built and used the structures to reduce the amount of capital they need to hold against corporate or trade finance loans. But some large banks are now hoping to sell their structuring expertise and help distribute the resulting trades to buyers, investors in the trades say.
The insurers, hedge funds or private equity firms are not bound by the same, relatively onerous capital regulations as the banks. That makes it easier for them to write protection on the underlying loans in a classic case of regulatory arbitrage.
Agreeing a price between banks and investors is said to be the primary sticking point for many potential deals, bankers and investors say. Investors also say the regulatory response to such trades can be unclear.
Last week Credit Suisse announced it had bought protection on the senior slice of its unusual employee compensation plan. The Swiss bank pays some of its senior bankers using a bond referencing counterparty risk, which also involves shifting some counterparty credit risk from the bank to its workers.
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