(Bloomberg) -- Banco Santander SA hedged its equity stake in an asset servicing joint venture with Credit Agricole SA, according to people with knowledge of the matter, as the Spanish bank seeks to lighten its regulatory burden.
The lender used what’s essentially a type of put option to offload risk from its 30.5% stake in an asset service known as CACEIS, and placed at least some of it into D.E. Shaw, according to the people, who declined to be identified because the transaction is private.
Capital relief trades that allow banks to shift risk to hedge funds and other private market investors have been all the rage this year — and Santander has been among the most active issuers. The deals free up capital banks would otherwise have to set aside to cover potential losses, and allow them to boost their solvency ratios.
In this instance, Santander is offsetting its exposure to CACEIS, according to the people. The French bank has a 69.5% stake.
Risk Transfers
Santander offloaded €30 billion ($33 billion) of risk-weighted assets during the first half, according to Chief Financial Officer Jose Garcia Cantera. About 40% of risk transfers have taken the form of SRTs tied to loans, he said.
“The rest is other types of transactions, like asset sales, hedges, etc.,” Garcia Cantera said on a conference call with analysts in July. “We expect to continue doing this. The demand for private credit is significant.”
D.E. Shaw stepped up as a buyer after Jefferies Financial Group Inc., which acted as arranger of the transaction, offered it to a small group of institutional investors focused on capital relief trades, the people said.
Representatives at Santander, Credit Agricole and Jefferies declined to comment. D.E. Shaw spokespeople didn’t reply to emails seeking comment.
Capital relief trades helped to raise Santander’s Common Equity Tier 1 ratio, a metric closely watched by investors and regulators alike, to 12.5% at the end of June, from 12.3% at the end of 2023. The bank targets a CET1 ratio of more than 12% after the phase-in of Basel III capital rules.
The stake in CACEIS stems from an agreement in 2019 in which Santander and Crédit Agricole agreed to combine their custody and asset servicing operations.
Strict Criteria
There is a strict set of criteria that determine what type of hedges can qualify for regulatory capital purposes. Representatives at the European Central Bank, which oversees banks, declined to comment.
Banks can net a financial sector exposure with a matching position where the two share the same “maturity, currency, interest rate, ranking in creditor hierarchy, conversion/write-down requirements,” among other features, according to 2018 guidance from the European Banking Authority to German banks.
The regulator, which is responsible for developing the rulebook that governs European banks, said that “if any of the characteristics differs, it is not possible to calculate such positions on a net basis.”
An EBA representative said by email that the advice in that letter reflects the current perspective.
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