The Back Alley Archives

Investment banks, including Goldman Sachs and Barclays Capital, are inventing schemes to reduce the capital cost of risky assets on banks’ balance sheets, in the latest sign that financial market innovation is far from dead.

The schemes, which Goldman insiders refer to as “insurance” and BarCap calls “smart securitisation”, use different mechanisms to achieve the same goal: cutting capital costs by up to half in some cases, at the same time as regulators are threatening to force banks to increase their capital requirements.
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Some rival bankers also view the schemes with scepticism. “This is a system of capital arbitrage,” said one senior banker at another investment bank. “The need for capital just miraculously disappears.”