Several US banks want to tap the value of the intellectual property holdings of their borrowers as a way of trimming their capital requirements, which are to be made tougher under Basel III rules.

Under the terms of many loans, banks have the right to seize a borrower’s patents and trademarks as part of a foreclosure proceeding. But these intangible assets cannot generally be counted towards the loan’s security for regulatory capital assets because they are considered too difficult to value.

The banks seek deals in which an insurer agrees to buy a borrower’s intellectual property – anything from a mobile phone patent to a logo or recipe – for a fixed price in case of default. 

That price could then be counted against the expected losses, in the same way the expected proceeds from a credit default swap can be used today.Now some banks – faced with tougher safety rules that begin to take effect in January – are exploring whether they can use the assets to reduce their estimates of expected losses in case of a default, in turn reducing the risk weight of the loan and overall capital requirements.