“Banker-A: Another round of systemic risk? Banker-B: Sure; make it a double”
It seems that big banks are helping their derivatives traders circumvent the spirit of Dodd-Frank Act. Instead of limiting risk, as the new rules were designed to do, the banks have decided to shuffle it around instead by swapping low-rated securities for loans of U.S. Treasuries and similar holdings that qualify as acceptable collateral under the new standards.
Why would banks do this? Billions of dollars in new fees. Banks saddling up for the rodeo include:Bank of America, JP Morgan, Deutsche Bank AG, Goldman Sachs, Barclays, State Street Corp. and Bank of New York Mellon.
Does this present a systemic risk to the banks? Yes. According to Fitch, the shift away from over-the-counter (OTC) derivative contracts toward clearing via central counterparties (CCPs) may drive new business opportunities for large banks, but changing collateral posting rules could also create new pockets of systemic risk.
Conclusion: Investors should keep a weather eye on the horizon when it comes to financials, as those who cannot remember the past are condemned to repeat it.