Learning to play around with loans
"The first time someone showed me one of these trades I thought to myself: something's not right here. How can this bank afford to pay away its credit risk that way?"
A typical reaction to a credit derivative from a corporate banker. Even more typical, one might think, for one running the corporate banking desk at the New York office of a regional Italian bank, Banca CRT (otherwise known as Cassa di Risparmio di Torino). But instead of shunning a product that he at first didn't understand, Bob DeSantes decided it might be a good business opportunity.
First he had to solve a dilemma: how could a major US bank be prepared to pay between 15 to 18 basis points for a five-year exposure when it was getting only 8bp as the originator of the deal? Because freeing credit lines to customers, lessening exposure to certain sectors, or freeing regulatory capital set aside against the risk brought either more business, a better overall return on capital, or both.
Once he had grasped that, he sought approval from the relevant people in the bank, sorted out the documentation, the accounting procedures and how to work within the constraints of the BIS and Federal Reserve rules, and set up a desk to deal in credit derivatives.