A Primer on Risk Participation Agreements

Risk Participation Agreements offer financial institutions opportunities to better align target risk/reward profiles

Risk Participation Agreements (RPAs) are off-balance sheet transactions in which one bank, the agent, sells part of its exposure to a contingent obligation to another bank, the participant, for a fee. The obligation is typically in the form of an interest rate swap or other derivative contract with a commercial client. The agent bank thus reduces its commercial client credit exposure, while the participant bank creates additional fee revenue in exchange for accepting some contingent credit risk.

This document is intended to provide bank officers and relationship managers at regional and community banks with a high-level description of the mechanics of RPAs, so that they can better understand how they work, and how they can be used to either mitigate contingent counterparty credit risk or to create non-interest fee income opportunities.

Throughout the paper, a concrete example of a typical, real-world set of transactions is utilized to illustrate the concepts presented, and to demonstrate how Derivative Path’s DerivativeEDGE platform can help banks drive and manage new business opportunities through the use of derivative products.

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