"Financial Industry back to their old tricks" as banks allying with Hedge funds as capital rules bite - by Jeremy Kahn & Liam Vaughan

CRTs often involve complex structures in which special-purpose companies are set up to provide protection to the bank through a credit-default swap, a derivatives contract that pays the buyer if a designated bond or loan portfolio defaults, and are in turn funded through the sale of notes to investors.

Launched in May 2011 with an initial investment of $75 million, Fery’s Toro II strategy, part of the firm’s Chenavari Credit Fund, is built on CRTs. Since then, Chenavari, with $4 billion under management across two funds, has invested about $1 billion in about 20 CRT deals, Fery says. The Toro II strategy earned 43 percent from its inception through the end of July.

While it’s impossible to know how many CRTs exist in total because most of the deals are private, regulatory filings indicate that European banks have engaged in at least $30 billion of these trades since 2009. CRTs use the same instruments, such as collateralized loan obligations and CDSs, that precipitated the 2008 financial crisis.

Regulators are wary of the banking industry’s renewed interest in risk shifting. The Basel Committee on Banking Supervision announced in December that it was considering new rules that would make CRTs more expensive for banks, potentially stemming the flow of deals. The new rules, which were expected to be announced in September, would have to be adopted by national regulators.

Christine Lang, a Swiss banking regulator who sits on one of the committee’s work groups, says it has warned banks against gaming new capital requirements.

“Now, we may have to come down very heavy on the industry,” she says.

Read more: Banks Allying With Hedge Funds as Capital Rules Bite - Bloomberg

European Financial Industry: EU Finance Chiefs Struggle Over Deal on Handling Failing Banks - by Rebecca Christie, Jim Brunsden and Andrew Frye

European Union finance ministers struggled for consensus as they took up an Irish-drafted compromise proposal for assigning losses at failing banks, extending a deadlock that doomed talks last week.

The bloc’s 27 finance chiefs remained “quite far away” from agreement as they convened in Brussels at about 6 p.m. today, Sweden’s Anders Borg told reporters. Ireland’s Michael Noonan, chairing the meeting, held preliminary talks earlier to get a deal he says is key for keeping EU crisis-fighting on track.

“We can and even must reach an agreement,” French Finance Minister Pierre Moscovici said. It’s “indispensable” for France and Germany to “advance together to find a solution.”

Talks last week foundered on the question of which creditors face writedowns when banks fail. Some countries demanded more flexibility for national authorities, while others sought strict rules across all 27 EU nations. Ministers considered several ways to set thresholds for losses that would need to be assigned via strict formulas before national discretion would be allowed.

An updated plan, circulated by Ireland, a week away from the end of its six-month rotating EU presidency, would hand regulators different degrees of flexibility depending on how they plug gaps that arise when some creditors are exempted from writedowns.

Read more: EU Finance Chiefs Struggle Over Deal on Handling Failing Banks - SFGate