Regional Banks want to slim down


Regional Banks Turn to Hedge Funds to Offload Risk Amid Regulatory Pressure

In a bid to avert a replay of last year’s banking turmoil, regional banks across the U.S. are entering complex and costly deals with hedge funds to manage their loan risks. These arrangements, known as synthetic risk transfers, allow banks to sell some of the risk associated with their loans to hedge funds, thereby strengthening their balance sheets to meet stringent regulatory standards. Ohio-based Huntington Bancshares is one such bank, partnering with Bayview Asset Management in December to mitigate risk on its $12.25 billion loan portfolio. Hedge funds, seeing an opportunity, are poised to gain substantial returns, with Bayview potentially earning up to 15% from its involvement.

This trend is gaining momentum, with other regional banks like Ally Bank and Truist Financial exploring similar deals. These transactions help banks comply with new regulations that demand higher capital reserves, akin to those required of larger institutions. By transferring risk, banks can stabilize and potentially resume growth activities such as share buybacks and acquisitions. However, these risk transfers come at a cost, impacting profitability due to the premiums paid to investors. Despite the high costs, the strategy offers a viable solution for banks to navigate the regulatory landscape and maintain financial health.

Our take (from the Straight to Smart newsletter):

Resist the rate cut hype – part 3

Article Excerpt:

Regional banks around the U.S. are striking complex and costly bargains with hedge funds, hoping to insulate themselves from a replay of the turmoil that followed Silicon Valley Bank’s failure last year. Wall Street smells a payday.

Ohio-based Huntington Bancshares recently entered into an arrangement to sell investors some of the risk that its borrowers won’t repay their loans. That helps the bank meet new proposed standards meant to make lenders look healthy to regulators.

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Regional Banks want to slim down

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