-139-
Risk rating Reserve Factor
1 0.05%
2 0.10
3 0.20
4 0.75
5 1.50
In calculating swap credit adjustments, FNBC did not commence
using the new factors until the second quarter of 1993.
d. Same Factors Applied to Loans and Swaps
FNBC (and other banks) used the same loss reserve factors
for swaps as it used for loans. Swaps were considered to be less
risky than loans by FNBC’s traders and legal department. By
virtue of the ISDA form agreements, FNBC’s legal department
believed that swaps allowed for protection superior to loans
against bankruptcy stays. The ISDA form agreements also provided
for netting; i.e., as discussed infra p. 142, the right of a
nondefaulting party to offset transactions in the event of a
counterparty default. Most of FNBC’s ISDA form agreements also
provided for other credit enhancements, such as cross-default and
other credit triggers. FNBC also had collateral for many of its
swaps in addition to the credit enhancements and netting
provisions.
e. FNBC’s Credit and Tenor Enhancements
FNBC used credit and tenor enhancements to reduce credit
risk on its swaps. In the case of at least some counterparties
considered by FNBC to be risks, FNBC reduced the tenor limit for
swaps with that counterparty, required that the counterparty
Page: Previous 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 NextLast modified: May 25, 2011