Derivatives good for seminars only

How come no bank went belly up after the Enron collapse? All the crediting banks had used certain risk covering techniques based on derivative financial instruments, specialists say. Although Romania has got more important financial market regulation problems on its mind than defining the derivative risk-coverage instruments, two specialists of the Banking Operations and Capital Markets Division of PricewaterhouseCoopers London came to tell the Romanian bankers what other people do to shield themselves from credit risks. The banks in Romania could use derivative credit instruments to lift the burden of risky credits off their financial statements in a matter of years, provided a proper legal framework is enacted, Jonathan Davies, PricewaterhouseCoopers (PwC) executive says. Unfortunately, the necessary legal framework is not there, as neither is it a priority for the authorities. Davies, however, feels these instruments could spur the development of the mortgage credit market, which is only just beginning. The mature financial markets are seeing a fundamental change in the major banks’ lending perception. Whereas until now a credit used to be considered a risk undertaken for the long-term in most cases, now the decision to lend money tends to be based on how easy it is to sell the receivable therefrom derived, with the credit subsequently turning into a merchandise that can be sold. This results in freeing up the capital immobilised to cover the credit risk, which can be reinvested for a better yield and make the financial statement of the bank look better. ZF