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Effective Use of Capital Relief Transactions

Posted
Updated
ByMichael Dhaenens

Description:

Research report by OSIS in cooperation with IACPM and GCD

 

The Credit Risk Transfer market is currently a small and private market numbering around 54 
transactions in 2018 with a dozen investors and a dozen banks mainly in Europe and Canada. 
There is therefore limited publicly available information. Another challenge is that new 
regulation is unclear and has certainly not been tested with real transactions. This creates a lot 
of uncertainty for existing players and even more so for newcomers like standardized banks 
and supervisors. 

The report constructed 17 loan portfolios from France, the UK, Belgium, the Netherlands and Sweden 
and across asset classes such as SME’s, Large Corporate, Commercial Real Estate, Residential 
Mortgages, Aircraft Finance, Shipping Finance, Trade & Commodity Finance and Project 
Finance based on real portfolio data. For the latter 4 categories, historical data from 
Global Credit Data has been used to calibrate specific stress test models. 

For each of the 17 portfolios, the report shows 6 different scenarios accommodating current and future 
regulations (Basel III and Basel IV IRBA, Basel IV with Output Floor, IFRS 9 and STS) and 
different macro scenarios (European Banking Authority (EBA) Baseline and EBA Adverse), 
resulting in 102 hypothetical CRT transactions. These 6 scenarios are based on real stress test 
models and real macro scenarios derived from the EBA stress testing and transparency 
exercises. Except in scenario 3, we kept the expected IRR (return after loan losses) for the 
equity investor constant at 7%. 

The report classifies CRT transactions economically interesting if the Cost of Relieved Capital (CoRC) 
is below 15% (an ROE before tax). 70% of all CRT transactions meet this objective and, if we 
exclude the residential mortgages, a considerable 80% of transactions add value for the bank. 
Even in an adverse scenario where the investor was fully compensated for higher losses, 7 out 
of 17 CRT transactions have a CoRC of below 15%. 

This research was conducted by the consultant company OSIS and in cooperation with The International Association of Credit Portfolio Managers (IACPM). 

The extended version of the report with details about the 
methodology, assumed transaction structures and analysis of main dynamics is available upon 
request

 

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