Domestic banks in Japan are being tipped to increase use of risk-transfer strategies, such as collateralized debt obligations or interest-rate swaps on loans this year. Local banking giants tapped public funding a few years back to patch up balance sheets but with the economy back on track, they are looking at paying back funding through a risk management approach such as transferring concentration risk on loan portfolios.
Yusuke Seki, senior v.p. in structured finance at Moody's Investors Service in Tokyo, said, "The main purpose is not being driven by Basel II, but by internal economic capital measures such as risk and return." He explained banks have been shifting from an earnings-driven approach in the last few years--when they were concerned with paying back public funding as quickly as possible--to a comprehensive risk management approach including derivative strategies such as swaps and CDOs. As risk management catches up with international standards, Moody's expects to see growth in risk transferring, as was seen in a synthetic CDO by Bank of Tokyo-Mitsubishi UFJ last month which looked to reduce domestic-name concentration risk.
The rising rates environment is also likely to give banks an extra push. There should be a greater awareness of interest-rate derivatives to better manage risk exposures, as well as the use CDOs to hedge credit risk as a result of rising default rates, explained Seki.
