AI debt boom has banks scrambling for insurance to offload growing risks - report
As big tech pours billions into data centers and artificial intelligence infrastructure, banks are taking on so much debt exposure that they're turning to insurance companies to protect themselves against potential losses, the Financial Times reports.
Lenders are also looking for ways to get around internal limits on how much they can offer to individual companies, projects and industries.
Barclays has reportedly bought credit insurance to hedge against risks associated with AI infrastructure loans, while HSBC has looked into the possibility and J.J. Phi Morgan ultimately decided against it.
Insurance allows banks to transfer part of the risk to insurers.
In a typical transaction, the lenders transfer 20-50% of their exposure in the loan to the insurer, freeing up capacity to finance larger projects without breaching the internal risk limits.
US banks are showing increasing interest as the cost of traditional credit default swaps - financial contracts that pay off if a borrower defaults - rises.
Unlike European and Canadian lenders, US banks generally cannot use credit insurance to reduce the capital they must hold, but it can still help them secure approval for larger loans.
The insurers realize money on demand:.
More than 70 providers, including AIG, Chubb and Axa, now offer credit insurance for project financing, compared to just a handful a decade ago.
Annual premiums to cover data centers can reach 50-70% of the profit that banks expect to earn on the insured portion of the loan.
The growing appetite for protection comes as opposition to building data centers grows in the US, driven by alarm over heavy electricity and water use, and pollution.
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