Abstract: Embodiments consistent with the present invention provide a credit enhancement structure for risk allocation between parties that minimizes the regulatory capital reserve requirement impact to an institution subject to capital reserve requirement. A subject pool of assets held by the institution, such as a pool of loans, is rated to determine its risk levels. Based on the rated risk levels, a guarantor party agrees to be responsible for a portion of the risk associated with the pool of assets, which may define the maximum risk exposure of the institution holding the asset pool. The risk-rated capital reserve requirements are applied to the asset pool based on the risk level rating and the guarantor's agreed upon risk responsibility such that the institution holds a reduced amount of reserve capital compared to what it would otherwise be required to hold.

Abstract: The disclosed systems and methods for hedging risk of differential loss related to separate pools of loan investments use criteria established by the parties for hedging risk of differential loss rates. The system monitors indirect performance indicators for a Reference Pool and a Subject Pool of loans, compares the indicators, and calculates a payment due between the parties (if any) based on performance differences for the two pools and a payment formula. Any payment due is paid according to a pre-established payment cycle. The loan pools may be formed and adjusted based on various factors, such as to compensate for changes in one of the pools. The payment formula may also be adjusted to compensate for changes or differences in the loan pools. The system may hedge either party's credit loss related to the Subject Pool if its loans perform differently than the loans in the Reference Pool.