Banks’ Motives For Providing Structured Products

July 16, 2009

Guaranteeing investors’ capital with their own bonds has always been a convenient way for banks to borrow money from investors at the same time as offering them a cut in the upside of the chosen underlying in a structured note. The importance of the structured products business’ fundraising capacity for banks is very difficult to quantify. Although there has not yet been a major shift into structured products because of their capital-raising capacity, it is extremely advantageous for banks right now. Such fundraising is often seen as a positive consequence of the structured products business rather than a reason for it, but current market conditions could be reversing this state of affairs. Surprisingly, some of the riskier credits are attracting the most interest. The importance of research into counterparty risk is heightened in these market conditions. While understanding the factors affecting product investment reasoning remains key, counterparty risk needs to go beyond looking at the credit rank of the underlying securities. Investors should be sure they are not buying all their structured products through one provider and that the various providers are pricing their products at competitive levels.