Blackstone Group LP, the world's largest private-equity firm, has devised a way to profit from regulation: It's helping banks meet tougher capital rules without the pain of selling assets or raising equity. The firm last year insured Citigroup Inc. against any initial losses on a $1.2 billion pool of shipping loans, said two people with knowledge of the transaction, who asked not to be identified because the matter is private. The regulatory capital trade, Blackstone's first, will let Citigroup cut how much it sets aside to cover defaults by as much as 96%, while keeping the loans on its balance sheet, the people said. For banks, the transactions offer a way to redeploy capital more profitably while meeting the stiffer requirements of the latest round of Basel rules. Critics say the practice doesn't make the lenders any safer and pushes the lending risk into the unregulated shadow-banking industry. "It's a form of financial engineering," said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world's largest bond investor. "It was dead but it seems to be coming back as investors scramble for yield. If you saw this on a massive scale, you would certainly question whether this was the best way for regulators to de-risk the system."