The crisis in the regional banks in the USA has put US lenders under pressure. They need to build capital buffers and reduce risks on their balance sheets. To do this, lenders are looking for helpful products.
• Risks of bank loans in sight
• Products already established in Europe, restrictions in the USA
• Lenders look for options
As Reuters reports, investors and lenders in the US are looking for ways to pool the risks of bank loans.
Credit risk transfers as a possible option
In order to reduce risk, particularly with regard to credit portfolios, appropriate financial products that help to do this are apparently becoming increasingly popular. One possibility for this is credit risk transfers, with which banks protect themselves against the consequences of a possible loss in connection with a loan by taking out insurance – for example with hedge funds – and thus transfer the position of the protection buyer. “The deals can free up valuable capital for lenders while generating juicy returns for investors and hefty fees for arrangers,” writes Reuters.
Established in Europe, but associated with restrictions in the USA
While such credit risk transfers have been established on the European market for some time and are common practice for financial institutions, the US credit market still has some catching up to do in this area. This is also related to regulatory issues, as Reuters points out: “US regulatory requirements set by the Federal Reserve limit insurance companies’ participation in these deals. The type of loans, mostly auto and mortgage loans, also limits the pool of potential investors ” said the news agency, citing investors and lawyers involved in such credit risk transfer transactions.
Intermediaries as a possible option
In order to circumvent the ban on the participation of insurance companies in capital relief transactions through which banks sell their risks to insurers, the use of an intermediary is currently being examined. According to a portfolio manager at a large institutional investor, this could be something like an intermediary bank purchasing credit loss protection from an insurance company and then selling that protection to another bank that wants to engage in a risk transfer transaction. In this context, however, it is unclear whether the US Federal Reserve would actually grant capital relief to a lender that uses such a construct, Reuters restricts. This depends on whether the protection sold is financed or not financed.
The portfolio manager sees the potential for such use and explained that a transaction of this type involving an intermediary would meet some of the basic requirements for transactions recognized under the banks’ capital rules – including the fact that the protection of a The expert told the news agency that it was sold to non-insurers with sufficient capital.
Volume has recently increased significantly
The need for such credit risk transfers is apparently high among financial institutions in the USA. Gareth Old, structured finance lawyer at Clifford Chance, highlighted that investors were increasingly turning to banks to structure the deals they wanted. “They essentially hire investment bankers on a sort of fee-based placement model Bonds“.
Since the end of September, seven U.S. banks, including JPMorgan Chase and US Bancorp, have reduced the risk of losses on mortgage, business and auto loans through risk transfers, according to the report. Some of these deals have offered double-digit returns and have attracted investors such as Ares, Blackstone and PGGM. The opening of the US market has led to a significant increase in global volumes, Reuters continued.
However, there are also concerns here, particularly from the legislature: on the one hand, these products can give banks additional capacity for lending and redistributing capital for other growth initiatives and shareholder returns, but at the same time they also spread the risk across the weakly regulated shadow banking sector.
“It’s in the nature of Financial markets“To push the envelope and then try to find that wrinkle to squeeze even more profit out of a certain type of asset,” said Som-lok Leung, managing director of the International Association of Credit Portfolio Managers trade group not yet the case, Leung continued to Reuters.
Wall Street is currently trying to expand the range of products used to secure transactions. For example, the risk transfer of complex portfolios, for credit cards and consumer loans, is being considered; the risk of loss in the real estate credit sector is also being targeted in order to create alternatives to a complete sale of loan portfolios at a discount. The market is also analyzing loans for leveraged buyouts by private equity firms, said Matt Bisanz, partner in the financial services regulatory practice at Mayer Brown, according to Reuters.
Editorial team finanzen.net
Selected leverage products on Ares Capital
With knock-outs, speculative investors can participate disproportionately in price movements. Simply select the leverage you want and we will show you suitable open-end products on Ares Capital
The leverage must be between 2 and 20
Advertising