Regulatory reform endangers credit portfolio management tools

03/27/2012 | Thomson Reuters

Securitizations, credit defaults swaps and collateralized loans obligations have been greatly reduced since the financial crisis as regulatory reform and market trends have placed pressure on banks trying to manage credit risk. IACPM Executive Director Som-lok Leung says regulatory reforms such as Dodd-Frank's proposed rule 127b, which was aimed at deals like Goldman Sachs' now-infamous Abacus CLO 2007 AC1, are ensaring legitimate synthetic CLOs. "This is the anti-Abacus rule. It was never intended to cover the kinds of deals that banks use to manage their balance sheets," Leung explains. "Another challenge that credit portfolio managers face is inconsistency from jurisdiction to jurisdiction. The UK says use ratings, while the U.S. wants to move away from them."

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