Bank Nationalizations May Not Trigger Default Swaps

Bloomberg reports:

Governments would need to take over all the assets of a bank and take charge of daily operations for a nationalization to trigger payouts on credit-default swaps, according to Bank of America Corp. analysts.

Simple nationalization wouldn’t be enough to settle the derivatives, which protect investors against a company defaulting on debt repayments, New York-based strategist Glen Taksler wrote in a note today. A collapse in share prices of New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc is stoking speculation the U.S. and U.K. will be forced to take full ownership of some financial institutions.

“It’s worth noting the high threshold that would be required for bank nationalization to trigger credit-default swaps,” New York-based Taksler wrote in the note. “Simply taking a substantial ownership stake through equity is not enough.”

Events last year provide a guide to what may have to happen to trigger payouts on the contracts, Taksler wrote.