Credit derivatives have enabled the Israel Discount Bank of New York to extend its leasing business to larger size corporates as well as grow the average size of its deals. Joseph Bench, first senior v.p. and chief risk officer, explained that when the firm, which has traditionally worked with middle-market clients, wanted to grow its leasing business it was constrained by lack of expertise in evaluating the credit quality of larger corporates and reluctance to take larger exposures to its middle market client base. By evaluating credit-default swap spreads, however, IDB realized it could make judgments about the credit quality of many large corporate names.
Using CDS spreads, IDB Bank organized selected corporates into three groups, representing different credit risks, Bench said. Based on these ranks, the firm then pre-approved leases of up to USD5 million, USD2.5 million and USD1.25 million, depending on the corporate's credit risk ranking and this dramatically increased the firm's potential leasing volumes. Further, when concerns on a leasing counterparty are flagged, IDB Bank can purchase credit protection on the name to cancel its exposure, which would be paid for from the premiums on the lease. Credit derivatives have similarly enabled the firm to increase its credit lines to corporates because it can cancel any unwanted additional exposure by purchasing protection, he said.
