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US Risk Transfer and Synthetics – New York City
April 27, 2022
Issuance of capital relief trades referencing US corporate loans is likely to remain constrained, even though a small pick-up in volume has occurred since 2020 with transactions issued by JPMorgan, Goldman Sachs and HSBC USA. Such deals are expected to be driven less by capital relief requirements and more by considerations pertaining to limit relief, profitability and balance sheet growth.
According to David Felsenthal, partner at Clifford Chance: ‘’There’s talk about a pick-up in US corporate issuance, but it’s unlikely that the situation will significantly change. The focus has been on mortgage products, but we may see a pick-up in other classes, as the market develops and as corporates get better established.’’
Similarly, a structurer at a large US bank notes: ‘’US corporate SRTs will make up the second wave of the US CRT market, but we expect issuance to remain constrained. With warehouse loans, for example, there’s a lot of them and they aren’t unsecured exposures.”
He continues: “Loan growth has also been slow, so there’s no immediate need for corporates. You also must bear in mind that 90% of clients in Europe are IRB, but in the US it’s standardised.’’
Indeed, according to Federal Reserve data, total loans grew through May 2020 – boosted by commercial and industrial loans (C&I), loan commitment drawdowns and paycheck protection program (PPP) loan originations – but then declined 5% in the last half of 2020. The decline in loans stabilised in early 2021 and growth has picked up since then, including for C&I loans.
Nevertheless, banks factor in the cost of issuing a CLN versus the cost of capital relief. For asset classes with relatively low default rates – like mortgages – that consume capital under the standardised approach, then synthetic RMBS, and similarly highly granular asset classes, are more economically efficient.
This topic will be one of many under discussion at the upcoming 6th Annual US Risk Transfer & Synthetics Seminar, taking place April 27th in New York, hosted by Clifford Chance. Please see above for details on the Market Overview panel that will be held at this seminar (please note, there will be additional speakers added to this panel).
We invite you to book your pass now by visiting the seminar website. SCI subscriber and group rates are available – please get in touch to discuss. Places at this seminar are limited and those places will continue to fill up quickly, so we recommend booking today to avoid disappointment.