WASHINGTON — Banks may be using credit default swaps to circumvent capital rules, potentially shuttling risk away from the regulated sector in ways that may pose systemic risk, according to a paper issued Thursday by the Office of Financial Research.

The paper examined bank use of derivatives — commonly known as swaps — to reduce capital requirements for risk-weighted assets. If a bank holds a loan whose creditworthiness is less than pristine, regulators require the bank to hold more capital to offset the risk of default. But banks can pay a third party to assume that enhanced risk on their behalf, essentially outsourcing the risk away from the banking sector.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.