Tom McKay

Banks are swerving around the regulators capital-to-risk requirements by entering into complex capital relief trades (CRT's) with Hedge Funds. A bank pays a third party, such as a hedge fund or pension fund, to take on some of the risk associated with its loans. That makes it easier for the bank to meet regulators' capital-to-risk requirements. CRTs often involve complex structures in which special-purpose companies are set up to provide protection to the bank through a credit-default swap, a derivatives contract that pays the buyer if a designated bond or loan portfolio defaults, and are in turn funded through the sale of notes to investors. Today's widespread use of these instruments could make it difficult to spot systemic risk... and another looming crisis. (VIEW LINK)


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