Banks abandon credit correlation book sales
* Book sales stymied by complexity of structuring
* Morgan Stanley's book - $35bn of RWAs - still in place
* UBS still open to selling book, at the right price
By Christopher Whittall
LONDON, Sept 13 (IFR) - Capital-constrained investment banks have abandoned plans to sell complex synthetic credit portfolios after failing to close deals earlier this year.
IFR reported in February that Deutsche Bank was close to selling its correlation book. This would have allowed the firm to shed 16bn euros of risk-weighted assets and hit its self-imposed target of slashing 100bn euros in RWAs by the end of March this year to boost its Core Tier 1 capital ratio.
But the German lender missed this deadline and is understood to have now shelved its plans to sell altogether. Deutsche declined to comment.
It is not the only prominent bank struggling to offload these exposures. Morgan Stanley's correlation book - which at US$35bn of RWAs at the end of 2012 is thought to be the largest in the industry - remains on its balance sheet.
Morgan Stanley declined to comment.
UBS is understood to be the only bank still contemplating a sale. The bank's chief financial officer Tom Naratil told IFR in February that UBS would not sell its book unless it received attractive offers, and was not reliant on a sale to meet its capital targets. The Swiss bank said last week that it stood by this statement.
"A couple of correlation books have been making the rounds. The decision whether to sell differs for every bank and depends first and foremost on the cost versus the reduction in RWAs, but also on how actively the risk and capital usage has been managed down over the past few years. Individual situations can be quite different at this stage," said Olivier Renart, deputy head of credit trading at BNP Paribas.
Correlation books include hangovers from the structured credit bubble such as synthetic CDOs, which epitomised the kind of excessive financial engineering that prevailed in the run-up to the financial crisis. Despite some firms suffering heavy losses on these books in 2008, most opted to keep hold of them rather than selling at fire-sale prices.
The imposition of Basel 2.5 was enough to make many firms change their minds as the capital treatment for correlation exposures ballooned. Deutsche's portfolio, for instance, equated to RWAs of 18.3bn euros a year ago for only 2.4bn euros of assets under international accounting standards.
Some banks got ahead of the game. In 2012 Credit Agricole shed 14bn euros of RWA and boosted its Core Tier 1 ratio by 49bp after selling its correlation book to BlueMountain Capital, a hedge fund. Natixis and Credit Suisse reportedly sold their portfolios to Morgan Stanley in a move that baffled the US bank's peers.
The decision from Deutsche and others now not to sell is testament to how complicated these exposures are to transfer. There is a limited pool of buyers due to the complexity of the positions, and it is also hard to persuade regulators to grant the required capital relief for the deals.
Outright sales are nigh on impossible due to the sprawl of counterparties a book will include, meaning the bank must instead enter a series of mirror transactions with the buyer to which they want to transfer the exposures.
Structuring such deals is no mean feat, and only transfers the market risk of the positions in exchange for counterparty risk to the hedge fund.
Meanwhile, the growing importance of the leverage ratio for banks reduces the appeal of entering a series of new swaps trades that will gross up the balance sheet.
"Selling a whole book is a very complex and lengthy transaction to structure with potential commercial and counterparty risk issues," said Renart.
All of the banks mentioned appear to be confident in hitting RWA targets without selling their correlations positions, most of which should roll off within the next few years.
Deutsche's correlation book had shrunk from 1.5bn euros to 900m euros in IFRS assets over the first half of the year, while its overall RWAs dropped 20bn euros to 314bn euros over the same period.
Morgan Stanley is ahead of self-imposed targets to reduce fixed income RWAs to less than US$200bn by 2016, having slashed US$41bn in the first half of the year to US$239bn.
UBS's credit exposures in its non-core unit have shrunk by SFr5.9bn to SFr13bn over the second quarter of this year.