“Banks are trying to boost their capital cushions by shifting risk to investment funds, even as global regulators threaten to clamp down on such transactions.

“In recent weeks, Citigroup Inc., Switzerland’s Credit Suisse AG and France’s Société Générale SA have marketed “synthetic securitizations” in which investors, for a fee, agree to absorb future losses on portfolios of assets. The transactions are designed to thicken the banks’ capital buffers by reducing the riskiness of their balance sheets. Citigroup wants to cap its exposure to shipping loans, Credit Suisse wants to curtail the risk of small Swiss businesses defaulting on loans, and Société Générale is aiming to reduce the credit risk in a derivatives portfolio.

“Global regulators, however, are moving to discourage such trades. Late last month, the Basel Committee—a panel of regulators and central bankers charged with setting international rules for the industry—issued proposed rules that would dampen the capital-enhancing impact of these trades. Rules outlined in a separate consultation in December might force banks to unwind existing transactions and come up with tens of billions of dollars to cover the resulting capital holes, analysts say.

“Industry officials involved in the transactions say the deals are still getting done while banks wait for more clarity about the shape of the new rules. If anything, some investors said they expect to see more activity in the coming months, to take advantage of any “grandfathering” of existing agreements, and as banks generally intensify their efforts to comply with new capital requirements.”

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