Investigates how Deutsche Bank managed to minimize its losses from the Wirecard collapse through the use of synthetic risk transfer (SRT) and explores the growing significance of SRT in the financial landscape.
When Wirecard collapsed a few years ago, Deutsche Bank only suffered a loss of €18 million — remarkably small for a bank that had previously stumbled into almost every major financial crisis worldwide. This particular incident was a gigantic mess right on its doorstep. Deutsche Bank had previously underwritten Wirecard bonds, arranged loans for the company, and extended a large margin loan to its CEO. Fellow German lender Commerzbank took a €175 million hit.
How did Deutsche Bank manage to avoid this disaster? FT Alphaville speculates that it was at least partly due to a financial engineering technique known as “synthetic risk transfer” — one of the hottest trends in high-finance these days. Deutsche Bank declined to comment. In SRTs, a bank transfers some or all of the risks associated with its loans to reduce the amount of capital it needs to hold for regulatory purposes. The loans remain on the bank’s balance sheet, but the buyer of an SRT typically agrees to cover a portion of the losses if the loans default. The buyers are investors such as insurance companies, hedge funds, and (increasingly) private credit funds, who assume the risk in exchange for a fee. As a sign that synthetic risk transfer has finally reached mainstream acceptance, this exotic form of securitization was featured in the IMF Global Financial Stability Report in October. In a side box, the fund’s analysts noted (FTAV’s emphasis below): As the IMF report suggests, SRTs are central to the growing relationship between private credit and banks. In fact, while they are sometimes seen as competitors, SRTs are crucial to how they can often collaborate, and help explain the increasing number of partnerships between the $3 trillion private credit industry and the traditional banking sector
Synthetic Risk Transfer Deutsche Bank Wirecard Financial Engineering Private Credit
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