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Vesper: ?Germany's deficit
increase is essentially a
revenue problem. The weak
recovery of the economy
combined with tax cuts has
lowered the tax revenue?
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German savings banks are using credit default swaps to reduce their credit risk concentration for the first time.
Thirteen savings banks from Hesse-Thuringia and nine from Bavaria are pooling credit risk synthetically, using platforms set up by the respective states' Landesbanken.
In the Bavarian deal, S-BayernBasket 1, the savings banks buy protection on individual reference entities from an Irish special purpose vehicle. The SPV pools the credit risks it has bought and issues a credit-linked note (CLN) that references the whole pool. A savings bank which has bought protection for, say, e5 million must invest the same amount in the CLN.
Although no savings banks have traded their notes yet, the CLN is designed to be tradable, and Bayerische Landesbank makes prices daily. As well as helping structure and administer the programme, BayernLB underwrote the CLN, a three-year floating-rate note. The first interest payments were made on August 11.
The savings banks' corporate customer base consists of small, unrated public companies, or private companies with minimal reporting requirements, often from a small geographical area. These can be high quality names, but it is hard to buy protection on them in the market.
?In our deal, they put in concentrated individual and industry risks from their credit portfolios and get back a bundle of risks from other savings banks,? says Claus-Peter Deglmann of BayernLB's structured credit products team. ?Diversification is the key issue.?
Once the CLN is actively traded, savings banks can move from diversification to credit risk transfer, selling risk to savings banks which didn't buy protection from the SPV, and in time to the wider market.
Trading should begin after the Bavarian Savings Banks Association gives its approval. The savings' banks risk management processes have also been scrutinised by the German regulator, the Bundesandstalt für Finanzdienstleistungsaufsicht (BaFin).
BaFin has said that the savings banks do not need to allocate 100% regulatory capital to both their loans and their investment in the CLN. ?They aren't
punished for the hedge,? says Deglmann.
The nine participating banks in Bavaria include Stadtsparkasse München, Sparkasse Nürnberg, and Sparkasse Mainfranken Würzburg.
With 82 savings banks in Bavaria, BayernLB hopes to bring more of them into future deals. ?We want to remain the main network bank and risk clearer for the savings banks in Bavaria,? says Deglmann.
The Helaba platform's SPV issues a basket CDS rather than a CLN.