Morgan Stanley Leads in Cutting Credit Correlation Risk

Morgan Stanley (MS) cut risk in its credit-correlation portfolio by 69 percent from this year’s peak as U.S. banks seek to reduce the capital tied to derivatives businesses built up before the financial crisis.

Morgan Stanley’s comprehensive-risk measure, which seeks to estimate potential losses in correlation positions over one year with 99.9 percent certainty, fell to $362 million at June 30, from a high of $1.16 billion in the first quarter, according to a regulatory filing by the New York-based company released this week. The risk-weighted assets tied to that business dropped $4.85 billion to $19.3 billion.

The bank halted large acquisitions of credit-correlation portfolios in an effort to boost capital ratios after buying positions with a notional value of more than $50 billion over the past three years, Bloomberg News reported in May. Chief Executive Officer James Gorman, 55, has said his company is exiting structured businesses including securitization units to focus on trading for clients.

Credit-correlation positions, primarily derivatives linked to corporate debt, indexes of companies and tranches of those indexes, produced billions of dollars of losses in the financial crisis. They included complex products such as collateralized debt obligations, or CDOs, that comprised pieces of other CDOs.

Photographer: Scott Eells/Bloomberg

A guard stands behind the Morgan Stanley logo at the company's headquarters in New York. Close

A guard stands behind the Morgan Stanley logo at the company's headquarters in New York.

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Photographer: Scott Eells/Bloomberg

A guard stands behind the Morgan Stanley logo at the company's headquarters in New York.

Rivals Reducing

JPMorgan Chase & Co. (JPM), Bank of America Corp., Goldman Sachs (GS) Group Inc. and Citigroup Inc. (C) have all cut their risk-weighted assets tied to correlation positions by at least $1.8 billion, according to reports disclosed this month. Charlotte, North Carolina-based Bank of America has $19.7 billion of such RWAs and New York-based Goldman Sachs has $20.8 billion. Citigroup cut its RWAs by 22 percent in the quarter to $11.1 billion.

JPMorgan, which lost more than $6.2 billion last year in a unit that held credit-correlation positions, has $52.6 billion of such risk-weighted assets. The New York-based bank’s comprehensive-risk measure was $2.47 billion at the end of the second quarter, almost quadruple that of any of the other firms.

Risk-weighted assets tied to correlation positions are determined by the comprehensive-risk measure plus a surcharge. RWAs under current rules are 12.5 times that figure.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net

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