Fitch Ratings said that U.S. banks, spurred by a federal regulatory change, will be encouraged to buy the riskiest pieces of a type of structured credit product or exit the investments altogether, Bloomberg News reported on Wednesday. JPMorgan Chase & Co. and Wells Fargo & Co. are among the biggest investors in collateralized loan obligations (CLOs), which bundle speculative-grade loans into securities of varying risk. Since April 1, the Federal Deposit Insurance Corp.’s method for calculating premiums has assigned a higher cost to all CLO investments, from the safest to the riskiest. Banks are grappling with the change in how the FDIC calculates their deposit insurance premiums, funds that are used to repay account holders if a lender fails. Banks that choose to keep investing in CLOs may stick to the riskier slices instead of the AAA-rated portions because they offer greater returns, Fitch said in a statement.
