I cordially dislike that phrase, but a lot of people call it that so I got in line. Ah well, mildly histrionic terminology notwithstanding the third Alphaville post is up.
Clearing and Collateral, Publications
Another very helpful explanation. What I found particularly interesting is you say corporates have “no rational alternative”. I would suggest that the passive role corporates have played in the creation of credit risk transfer structures for their funding purposes is changing.
Corporate treasury are aware they do not want to be caught again as they were in 2009 by outsourcing funding liquidity risk (and ultimately their reputation and solvency) to their liquidity providers. As the financial infrastructure reforms after the GFC, corporate liquidity risk management – an understandable concern of any funder as part of their continual “Going Concern” assessment – is unlikely to rely to the level it did on the failed credit structures created by traditional credit intermediaries.
This will mean corporate treasury teams increasingly see value in building credit impairment reserves within formal captive insurance structures rather than simply held informally on their balance sheet. These enable corporates to better manage operating cash-flow, payment obligations and credit impairment as receivables fall due. By optimizing internal liquidity, such an approach also reduces demands on external funding. If the CRT mechanism also de-risks collateralised/sold assets within an ABL/ABS transaction, the banks RWA exposure amount improves as PD & LGD reduce, eliminating the need to charge the corporate for more CDS.
Of course, this solution isn’t favoured by banks with falling revenues and lower margins. But that is not an immediate concern for Real Economy mid-Cap CFO’s receiving terms sheets offering poor advance rates on short-term assets at funding margins that do not fairly reflect risk. Many corporates must therefore become their own credit risk underwriters as they can no longer rely on their banks or rating agencies methodologies or often generic credit risk data.
It’s no silver bullet but then, life is never that simple!
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