U.S. banks have found a new way to unload risk as they scramble to adapt to tighter regulations and rising interest rates, the Wall Street Journal reported. JPMorgan Chase, Morgan Stanley, U.S. Bank and others are selling complex debt instruments to private-fund managers as a way to reduce regulatory capital charges on the loans they make. These so-called synthetic risk transfers are expensive for banks but less costly than taking the full capital charges on the underlying assets. They are lucrative for the investors, who can typically get returns of around 15% or more. U.S. banks mostly stayed out of the market until this autumn, when they issued a record quantity as a way to ease their mounting regulatory burden. Regulators have been raising capital requirements for years, and they proposed even tougher measures after the banking panic that began in March. Higher interest rates are eroding the value of banks’ investment portfolios, which can also eat into regulatory capital levels. In most of these risk transfers, investors pay cash for credit-linked notes or credit derivatives issued by the banks. The notes and derivatives amount to roughly 10% of the loan portfolios being de-risked. Investors collect interest in exchange for shouldering losses if borrowers of up to about 10% of the pooled loans default.
