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Derisking your capital-at-large portfolio | Advantage Banking (European Banks deleveraging)

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Caution: The contents of this bank secret are not proprietary and frequently in use at all large institutions including those not targeted by the Occupy movement.

Most parts of this secret are not transferable to automatic protection against fraud and may not support further contagion. Purely for technical reasons, this secret is not compared with other European banks issuers who have been issuing and buying their own bonds to produce as collateral . The collateral stuck in the mud routine needs a 300% support from the new loan facility, justas ECB’s $3.7 tln balance sheet is half filled with junk collateral ( at a conservative projection of 100% collateral where after risk weight adjustments collateral for a B grade is up wards of 200% )

We are going to reveal a Risk Optimisation secret

If you are a (Credit) risk management professional, you already know – you could start by saying sorry to everyone at #OWS if you think that is baggage you want to honestly churn and burn to turn over a new leaf..

Hat tip to our also ran in the 2011 awards..the FT alphaville team. Read and enjoy regularly, they leave you in a good mood to comment on posts here in..

How to make the penny loans count..


Basel II Risk Weight Adjustment parameters require a 350% collateral for >B+ ( not junk rating. BB- to BB+) and a capital deduction ( 50% from Tier I and 50% from Tier II) for all rated junk i.e, B+ and below. They also require a much lesser but  equally expensive 100% weight for BBB+ to BBB- which is a big deal as a discount but means that your cost of Tier I is 7.5% for a SIFI bank for rated investment grade debt and it is 5 times more than what you would hold as capital for AAA French debt with hardly  a cent in benefit to your P&L! 

AS A MIDDLE OFFICE MANAGING DIRECTOR i can only blame the traders so much for buying and selling profitable stuff till K Aduboli happens in my office and till then i want to make sure everything in the book is accounted and capital provided at a good average cost and enough capital left over for the rest of the year

AS THE BANK PRESIDENT AND CFO my responsibility is to ensure I can show profits despite the massacre of 2011 and with trading income wiped out, the hole must not show and enough should be left over esp with discussions on bank deleveraging and our exposure to Europe

REGULATION requires a psovision of capital and surcharge as G SIFI/SIFI for every dollar of RWA I hold. If I am JP Morgan, regulation requires me to hold 8% under Tier I Common Equity and another 6% as Tier II Capital which may not be fully guaranteed with primary collateral or other unsecured forms allowed on each parameter , to sweeten the deal  including calls and puts to governments though the government lent you the money (Preference Trust Debentures/shares, COCO bonds and others)



As European banks started mulling deleveraging, European Banks as well as counterparts in the US started a verification exercise on their Internal risk models to adjust where plausible the risk weighting of assets downward..( IF i had to compare to sovereigns in the model I could easily take most exposures 3-4 notches higher and provide much lesser Capital on such debt on my books as Assets

Also interbank capital is now limited ( exposure to wholesale markets for capital now requires a much larger surcharge from the new Basel regime and will cost the banks more thus requiring additional capital of up to $45 bln at Bank of America ( after making sales worth $50 bln) and $60-90 bln at Deutsche Bank) 

AS a part of this exercise, what banks can now do is call up other middle office managers at banks and arrange for purchase of ABS securities from these baskets mixing the not so good bitds in BBB+ and B+ weights of 100% and 350% with those that have no weight at all and require a deduction of capital. As these would not sell at any price, the German preferred option of First loss guarantees is added to each security from Triple A rated banks ( BNP for example is still AA) and thn these can be sold for a pittance to each other. AS I have bought and sold an equivalent number, my risk and my cost has not changed, while for RWA purposes, the protection clause in Basel 2 is triggered bringing it to 20% of weight category or somewhere near that objective.

Hey Presto..2011 Financials were duly reflect the CAR and profitability required to keep the rating on the 30 year bonds just in fashion and I don’t have to sell any of my loans or myself at deep discounts.

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One comment on “Derisking your capital-at-large portfolio | Advantage Banking (European Banks deleveraging)

  1. Pingback: European Sovereign Debt Crisis: Measuring your collateral now | The Banking and Strategy Initiative

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