DEUTSCHE KREDIT BÖRSE (DKB), a new exchange enabling banks and other financial institutions to trade single corporate loans so that they can better spread credit risk, has gone live in Germany.

Essentially, the exchange works by allowing a bank that is overexposed to a certain corporate sector to offer those loans on the DKB to another bank which has a much lower exposure. Such a deal is known in financial circles as a “true sale transaction”.

DKB, which is based in Munich, does not set prices for such transactions. Instead, these are agreed by the buyer and seller, as on any exchange. DKB said that, initially, trading of the loans would have to be done either in person or by telephone. From mid-2005, all transactions on DKB will be done electronically, the exchange said.

DKB also stressed that bad corporate loans were not welcome on its exchange, adding that it had brought in the rating agency Standard & Poor’s to scrutinise each and every one traded. All information about the loans, including their individual ratings, will be stored on DKB’s database.

According to the DKB, the trading of single loans in Germany has a market potential of as much as €60bn. However, Michael Klein, one of the exchange’s two founders, has declined to venture any specific business projections. “Our internal estimates make us very confident,” was all he would say at a recent news conference in Frankfurt.

The advent of DKB is, in any case, good news for Germany’s banks. Many of them are overexposed to certain industries, owing to a past policy of offering cheap and easy credit to the Mittelstand – the small and medium-sized enterprises that drive the German economy. Experts say DKB is a blessing to the Mittelstand too, as the exchange enables banks to clean out their balance sheets, which in turn boosts their capacity to lend.

DKB’s two founders own 70% of the exchange and Lehman Brothers, the US investment bank, holds the remaining 30% stake.

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