Bank of Ireland Issues Credit Default Swap During Capital Requirements Revision
Bank fo Ireland announced on Friday that it was executing a credit risk transfer transaction on a portfolio of business banking and corporate loan assets effective 29 December 2016. The bank also announced that it was revising its calculation of capital requirements under the Internal Ratings Based (IRB) approach on its Republic of Ireland mortgage portfolio.
The move comes ahead of a review of euro zone banks by the European Central Bank next year as new standards are adopted, according to Joe Brennan writing in the Irish Times.
The bank of Ireland Group expects the combined net impact from these capital developments on the Group’s transitional CET1 ratio to be a reduction of c.15bps (fully loaded CET1 ratio: c.20bps).
The credit risk transfer transaction on a reference portfolio of c.€3 billion of loan assets is expected to benefit the Group’s transitional CET1 ratio by c.50bps, the Group’s fully loaded CET1 ratio by c.40bps and the Group’s transitional Total Capital ratio by c.65bps.
The transaction involves the execution of a credit default swap backed by c.€185 million of credit linked notes issued by Grattan Securities DAC to a small group of international investors. The transaction reduces the Group’s credit risk exposure, and consequently the risk weighted assets on the reference portfolio of loan assets, through a risk sharing structure whereby the buyers of the notes assume the credit risk for c.€185 million of potential credit losses on the reference portfolio of loan assets in return for an initial annual coupon (interest expense) of c.€21 million.
No assets will be derecognised from the Group’s balance sheet, the bank said. The reference portfolio of loan assets and related customer relationships will continue to be maintained by the Group.
Meanwhile, the bank is revising its calculation of capital requirements under the IRB approach on its ROI mortgage non-defaulted loan portfolio. The revision is in advance of the ECB’s targeted review of internal models (TRIM) due to commence early next year and increases the pro-forma average credit risk weighting on ROI mortgages to 34%.
On a pro-forma basis, the revision is expected to reduce the Group’s transitional CET1 ratio by c.65bps, the Group’s fully loaded CET1 ratio by c.60bps and the Group’s transitional Total Capital ratio by c.85bps.