Analysis-Fed shines light on path to US bank capital relief trades
- A clarification of capital rules by the Federal Reserve may encourage U.S. banks to transfer more of the risk in their loan portfolios to investors, potentially letting them free up capital.
By doing so, if they get capital relief, they would reduce the capital they need to keep against them for regulatory capital purposes, according to banking industry sources. The Fed clarified that synthetic securitization transactions – that refer to the performance of a set of loans in a bank’s balance sheet - by U.S. banks where credit-linked notes were sold through a special purpose vehicle would automatically qualify for capital relief.
“It has been an uphill struggle for banks to get approval for favorable capital treatment on credit risk transfer securitizations because a lot of U.S. regulators express knee-jerk skepticism on bespoke products,” said Bright. These clarifications come after growing calls for clarity on which of these bespoke trades issued by U.S. banks would qualify for capital relief, the banking industry sources said.
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