As Brazil continues to become a key player in Latin American securitization, sources say one major domestic Brazilian bank is taking steps to improve the credit risk involved in CLO transactions.
The bank is said to be in talks with a small New York-based consulting firm and is expecting results from a credit default study by July. The consulting company is working with the bank in order to determine the expected risk of each loan.
The bank will then use the default study techniques presented to them by the consulting company to evaluate the risk of each transaction and hopefully receive enhanced ratings on CLO transactions.
According to sources, Brazil is looking to improve risk protection techniques in order to counter the historically high volatility it has experienced over the past few years. However, "Brazilian credit authorities are being proactive in their credit risk management techniques more so than relatively less volatile environments such as the United States," said a source form the consulting company.
The country has been looking for methods to improve credit risk protection for quite some time. In 1998 Central Bank Resolution 2682 was promulgated. The resolution is a capital allocation mechanism that provides banks with a limited time period to determine which loans have defaulted and when they defaulted. The consulting company is using the capital allocation scale of the resolution to help implement better risk management practices.