The Federal Reserve Board and the Office of the Comptroller of the Currency issued guidelines Wednesday on how capital charges could be reduced by using certain credit derivatives.
Examiners and many banking organizations have been notified by the Fed and the OCC of the conditions that "synthetic" collateralized loan obligations must meet to receive the favorable treatment.
If examiners determine that the structure of these derivatives do indeed remove nearly all of the credit risk from the underlying loan portfolio, then the regulatory capital requirements could be reduced.
Corporate credits normally get a risk weight of 100% and a regulatory capital requirement of 8%. But the guidelines suggested that if bankers transfer "virtually all of the risk" to investors through derivatives, regulators could lower the risk weighting to 20% and trim the capital charge to 1.6%.
The Basel Committee on Banking Supervision has proposed a similar treatment as part of its effort to overhaul international capital standards. In the meantime, the agencies' 13-page letter details the structure of these derivatives and how they should be assessed. -- Katharine Fraser