Overview
The Bank Regulatory Capital Relief (“Reg Cap”) market is growing rapidly on the strength of a strong relative value story. In Reg Cap transactions, investors are paid to assume a tranche of the credit risk on a specific portfolio of the issuing bank’s assets, which reduces the bank’s regulatory capital requirements and can dramatically improve their return on capital. In essence the bank is buying “insurance” from investors. Because banks receive ancillary benefits, including capital relief, from this insurance, and because Reg Cap structures are complex and appeal to a limited investor base, the “premium” banks pay Reg Cap investors is significantly higher than dictated by the credit risk being insured.