51 at the close of the Paris stock exchangeTheir tax rises in principle to EUR 359First industrial retain significant budgetsBowfounds Marignan realizes from the EhpadAll of the staff concerned will be a position elsewhere in ChanelChurchill in more difficult circumstances was reachedMany unknowns still persist at this stage3 billion posted at the beginning of the yearAll our hotels are empty said Nicolas VionThree policemen were also injured in this operationIn times of crisis, have purchased protections may be a strong pay strategy for banks. But not necessarily for the reasons believed. For some institutions, management of risk that banks retain when they grant credit to a large company, hosted in the "credit portfolio management" (CPM), becomes a significant contributor to the results. Société Générale, the Bank has the most developed this mechanism, the PMO has reported EUR 1.6 billion to only fourth-quarter and more than 2.1 billion euros for the year, compared with 266 million in 2007.
Historically, the CMP functions have emerged in the early 2000s in French banks. The goal was simple: allow the institutions to protect themselves against the risk of failure of enterprises to which they had lent. The rise of credit derivatives (or "credit default swaps", CDS) allowed them to buy on the market of the protections against this type of risk. The probability of failure of large companies being then considered quite low by the market, the price of CDS was low.
Société Générale has been particularly driving in this area. By 2000, it purchased large volumes of protections to cover its credit portfolio, which reached 50 billion euros in 2006. BNP Paribas and Credit Agricole, whose portfolio reached 20 billion at the same time, have been less precursors in this field. The PMO then had a double function: managing extreme risks on certain large customers and save own funds. Once a loan is covered by a CDS, it consumes indeed less capital.
Accounting abnormality
With the rise of big business risk, the PMO has acquired a new function. In some institutions, it now allows to smooth the way defensive and accounting result. Protections acquired when there was no risk of default is are indeed greatly valued in recent months. In the balance sheets of banks, they are also recorded in "mark to market", i.e. at market value, when the underlying credits are not. The CDS may strongly appreciate that the value of the underlying credit degrades in the books of banks. Allowing them to identify the very significant amounts réappréciations, just very opportunely cushion results affected by other professions. Accounting abnormality which Société Générale was able to benefit. "It is absurd that the accounting treatment of the CDS and the credits in the balance sheet is not the same," said a specialist.
The gains made when the credit quality deteriorates are temporary and must be resumed when the credit réapprécie. To materialize the gains, some banks can choose to sell the protections purchased when the risk of default was low, then taking the risk of be more covered. "If the Bank considers that the risk premium of the CDS is much higher than the actual risk, as is the case currently on some companies, it can make the choice to take profit and to discover, even buy protection later, less expensive, says an expert." It is not open to criticism as such but must be transparent and say to the market. "This is not yet in patterns.
