Basel Committee analyzes synthetic risk transfers, highlights monitoring needs
The Basel Committee on Banking Supervision has published a report analyzing synthetic risk transfer (SRT) transactions. The report highlights the rapid growth of SRT markets and their importance for bank capital relief, while emphasizing continued supervisory monitoring.
Capital relief and market growth
Synthetic risk transfer (SRT) markets have witnessed rapid expansion over the last decade, becoming an important source of capital relief for banks managing corporate credit risk.
SRT transactions involve transferring all or a portion of the credit risk of a pool of assets to a counterparty, while the bank retains ownership of the underlying assets.
This mechanism is primarily driven by banks' needs for efficient capital and credit risk management.
The investor base in SRTs is dominated by private investment funds, though public sector entities also play a significant role in some jurisdictions.
The report highlights that SRT markets are particularly vibrant in Canada, the euro area, the United States, and the United Kingdom.
In these regions, the total value of protected assets is estimated at about EUR 750 billion, which accounts for 1.1 percent of total bank assets.
This substantial volume underscores the growing economic importance of SRTs in the global financial landscape, reflecting their utility in optimizing bank balance sheets.
Prudent structures, persistent risks
The Basel Committee's analysis suggests that current SRTs are more prudently structured and managed than pre-Great Financial Crisis (GFC) securitisations.
Regulatory reforms since 2008 have simplified these instruments and increased scrutiny on credit risk transfer transactions.
Nevertheless, some market participants and jurisdictions still point to 'blind spots' in disclosure and SRT financing.
Risks, including banks' growing reliance on non-bank financial intermediaries (NBFIs), are recognized and actively managed.
However, the Committee stresses that these evolving risks demand continuous monitoring by supervisors as SRT markets continue to grow.
This report contributes to the Committee's ongoing investigation into the interconnections between banks and NBFIs, aiming to bolster global financial stability.