How can banks manage their regulatory capital?

23 min read 21 Nov 19

Summary: In order to meet (and increasingly exceed) the capital requirements set out by the regulators, banks have had to focus on reducing the asset size of their balance sheet. By entering into ‘risk-sharing’ transactions, banks can achieve much-needed capital relief. This paper explains how the different types of trades work in practice.

  • Bank regulators permit banks to meet more stringent post-crisis capital ratios by undertaking risk-sharing transactions.
  • Banks can manage their regulatory capital on an ongoing basis through whole loan asset sales, full capital structure securitisation or synthetic securitisation.
  • The mechanics of these transactions may differ, but all three approaches focus on achieving a common outcome: regulatory capital relief.

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The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

By Jerome Henrion