Credit derivatives form one potential growth area. Credit risk is an important issue for banks, particularly in Asia. Before credit derivatives were invented, banks generally had to stop extending new loans or services to customers to whom they had excessive exposure. This worked against the banks’ efforts to maintain valued client relationships. Credit derivatives provide banks an alternative. Banks can now repackage and divest excess credit risk exposures, and continue to service their clients. MAS has studied how credit derivatives should be captured under the existing capital adequacy framework for banks. It has circulated draft guidelines to industry players and associations for comments. MAS has now finalised the guidelines,4 which address capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure. If banks assume credit exposure via the use of derivatives, they will be subject to capital charges. But if banks use credit derivatives to hedge their underlying risk exposures, they will be granted relief, depending on the degree of risk transfer. For example, where the hedge is imperfect, because of mismatches in maturity, asset or currency, regulatory relief will still be available, albeit to a smaller extent. A second promising area is that of securitisation. Like credit derivatives, securitisation allows banks to manage their credit risk and capital more effectively. In its basic form, securitisation involves pooling assets in a special purpose vehicle, which is then funded by issuing securities.

The implementation of this strategy is funded through levies on the financial  BIS Review 139/2010  1  services industry and through partnership programmes with a range of stakeholders, including financial services providers. There appears to have been little contestation of the strategy, with broad support from the industry, the Treasury and other stakeholders. In South Africa, the Financial Services Board (FSB), the regulator for non-bank, non-credit financial services, has developed and championed two national strategies; a strategy developed in 2001 and a revised version in 2008. The 2001 strategy received limited support from stakeholders and the FSB revised it in 2008. However, the revised strategy did not receive much support and is currently under review. Contestation of the South African strategies arose mainly from the fact that the FSB is not the regulator for the banking sector, and banks were against having their activities regulated through a non-bank regulator. Contestation also came from civil society organizations and other regulators, in particular, the credit regulator. Ghana has had an approved strategy for financial literacy and consumer education since January 2009. In the first attempt, largely consultant driven, it appears there was insufficient stakeholder buy-in. However, in the second process which was driven through the Ghana Micro-Finance Institutions network, there appears to have been sufficient stakeholder buy-in, and in due course, the Ministry of Finance accepted responsibility for the strategy and has been tasked with its implementation.