BIS Review 76/1998  -5-  Credit derivatives are another technique for managing both risk and risk-based capital charges. Derivatives are ways of slicing and dicing the risks and returns of assets, so that the risks and returns can be allocated more efficiently among ultimate risk takers.
With a credit derivative, a bank can transfer the risk and returns associated with a loan, even though from an accounting perspective the loan remains on the books of the bank. By using credit derivatives, banks can create “synthetic securitizations” to transfer risk and reduce risk-based capital requirements, while avoiding disclosure of an effective loan sale and possibly harming a customer relationship.