"Cluster Risk-Free" Debt Trading
Basel II not only forced the challenge on banks – the guideline also fosters innovations: Like the first online trading center for loan investments from RMX Risk Management Exchange AG.
“Turning risks into opportunities,” touts RMX, and justifiably so: Because with its internet stock exchange platform for debt trading that T-Systems developed and operates for RMX, financial institutions can intelligently distribute and fine-tune the default risk on their loans – exactly as the European guideline Basel II proposed. For a variety of reasons, it makes sense to spread credit risks as broadly as possible across classifications based on region, industry, and creditworthiness. A task that was easier said than done, until now. Especially for regional institutions like savings banks and credit unions. Firstly, these types of institutions highly depend on the local economic structure – if there are only a few local industries, then loans can only be issued to these. Secondly, the trade in individual loans between institutions of various banking groups in Germany was a factual impossibility – at least, until now.
As a result, the “cluster risk” rapidly threatened smaller institutions. The technical term indeed sounds ugly: That’s the term Bankers use to refer to a unilateral risk loan portfolio. With the new trading center, this danger may once and for all be a thing of the past for RMX, the independent, publicly controlled stock exchange. Banks – especially those which up to now relied on the agriculture market – can use it to buy loan participations from institutions that previously had to concentrate on specific manufacturing industries – and both sides improve their risk structure. Importantly, these transactions are protected by the legal framework of RMX‘s trading terms and conditions, which are subject to public law. In turn, this provides protection of confidence for loan customers, and protection of customers for lending institutions.
Add yet another advantage: The RMX platform meets not only the highest possible security standards in regard to data protection and bank confidentiality. It even provides the standardization of the loans: Standard & Poor ‘s, the ratings agency, determines the default risk in a uniform procedure, and the loss rate, on the basis of debtor’s annual financial statements and securities data. In short: “Our stock exchange platform is an innovative instrument where we can provide optimal support to the finance sector,” reports Paul-Gerhard Kopatz, Chair of the RMX Board of Directors.
