Public scrutiny beats regulatory caution

The Basel Committee is right to warn local regulators about capital relief deals that seek to game the system. But more transparency in the market would be a big step towards safety, without restricting legitimate risk transfer.

  • 20 Dec 2011
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Rarely do cheery missives emanate from the town of Basel, but one on Friday had particular implications for the capital relief market, set to be one of the stars of 2012 as banks try to squeeze their risk-weights.

Capital relief securitisations – banks buying protection on the riskier tranches of any given portfolio – come packaged in a way that could have been designed to put a regulator’s hackles up.

Bespoke credit default swaps, with protection written by secretive counterparties in unregulated markets on tranched risk. Worse, banks want to do this because it boosts their capital ratios by making whole books of risky assets less risky. A perfect storm of regulatory contempt.

But the concept underneath it all is extremely useful.

Funds with high return targets (and correspondingly high risk appetites) can help to derisk banks. They may not have much appetite for the business of banking, but they like the assets banks carry on their balance sheets, and they like buying that risk.

If we want less risky banks (and who doesn’t, these days?) then we should want entities outside the banking system to buy their risk.

Provided banks are genuinely selling their risk, regulators should be fine with it too. Even the Basel note acknowledges that it can significantly reduce credit risk, provided portfolio guarantees are “direct, explicit, irrevocable and unconditional”.

It has a problem where banks appear to be gaming the system – booking the costs of protection separately from the capital relief, using calls or optionality to conceal the economic life of a transaction, or misvalued portfolios.

But better than the heavy hand of regulatory vigour would be the light touch of market attention.

No figures exist detailing which banks use capital relief securitisations, how much they use them, or which portfolios they are buying protection on. Some banks include aggregate figures in Basel II Pillar 3 Disclosures, published once a year. But most trades are completely below the radar, using unlisted bespoke derivatives and the supervisory formula method (instead of ratings) to prove significant risk transfer. Often a deal goes to a single counterparty, so even investors in the market may not have access to the full story.

If you’re a bank investor, this ought to matter.

Levels of capital, assets and risk-weighted assets all depend on to what extent banks have booked capital relief trades. Without an understanding of which assets a bank owns (which assets you own, if you are a part-owner of the bank through your shareholding), how can investors do a proper financial analysis of the risks of funding banks?

A more public market would also give more clarity on price and structure. That can make a market more liquid and more standardised, reducing the scope for the sorts of abuse Basel mentions.

It’s not clear who benefits from the secrecy at the moment, either. Investors who buy these deals typically hold them to maturity, so there isn’t a strong trading disadvantage in disclosing their involvement – in fact, it may flush buyers out of the woodwork, creating a viable secondary market in this debt.

Banks might argue that they benefit from the opacity of these dealings. But bank investors don’t seem to care, yet, about the scale or scope of these deals – meaning keeping them secret or discreet can flatter headline numbers with few negative consequences.

But this is short-sighted. Few people would argue that bank funding is in a healthy state. Confidence is paramount. Banks don’t suffer just from low capital ratios or risky business – they suffer much more from uncertainty about where they are marking their assets or exactly how risky a certain business line might be.

Banks need all the help they can get raising capital. If that means improving public disclosure, it is a small price to pay compared to the risk that regulators shut down the market.

For their part, regulators should feel better if many pairs of eyes get to look at each trade. The inventive and unscrupulous will always try to get ahead of their regulator, and transparent scrutiny is the best defence against it.

Bare all, before Basel forces the pace!

  • 20 Dec 2011

Bookrunners of Global Covered Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Natixis 2,220.67 8 6.41%
2 UniCredit 2,187.22 10 6.31%
3 UBS 2,159.55 11 6.23%
4 Credit Suisse 1,824.93 10 5.26%
5 Barclays 1,806.80 7 5.21%

Bookrunners of Global FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 12,745.74 25 9.57%
2 Morgan Stanley 11,952.09 26 8.97%
3 Bank of America Merrill Lynch 9,510.22 21 7.14%
4 Barclays 9,168.66 18 6.88%
5 JPMorgan 8,863.17 26 6.65%

Bookrunners of Dollar Denominated FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 12,192.75 22 13.89%
2 Morgan Stanley 10,975.91 20 12.50%
3 Bank of America Merrill Lynch 9,178.29 19 10.45%
4 JPMorgan 8,170.99 20 9.31%
5 Citi 7,477.94 20 8.52%

Bookrunners of Euro Denominated Covered Bond Above €500m

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Natixis 2,071.95 7 9.04%
2 UBS 1,682.16 6 7.34%
3 UniCredit 1,662.07 7 7.25%
4 LBBW 1,541.66 6 6.73%
5 Deutsche Bank 1,380.66 4 6.02%

Global FIG Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 Morgan Stanley 365.83 497 7.62%
2 JPMorgan 332.66 618 6.92%
3 Bank of America Merrill Lynch 299.89 590 6.24%
4 Goldman Sachs 276.71 375 5.76%
5 Citi 264.54 592 5.51%

Bookrunners of European Subordinated FIG

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 1,031.57 1 27.24%
2 UBS 439.82 3 11.61%
3 Goldman Sachs 356.49 2 9.41%
3 Bank of America Merrill Lynch 356.49 2 9.41%
5 Lloyds Banking Group 249.35 1 6.58%