Synthetic risk transfers: a growing tool for bank capital management

Pedro Machado, Member of the Supervisory Board of the ECB, highlighted the growing importance of synthetic risk transfers (SRTs) for financial institutions.

SRTs are guarantees on credit risk from loan portfolios, allowing banks to manage balance sheets, release capital, and support new lending by transferring credit risk to third parties.

Supervisors, like the ECB, assess these transfers to ensure they are significant, which then allows banks to reduce capital requirements on securitised exposures.

The EU has become the world's largest market for synthetic securitisations, holding half of the global outstanding amount by the end of 2023.

Issuances almost doubled between 2023 and 2025, with a 45% increase between 2024 and 2025.

This rapid growth is attributed to their cost-effectiveness compared to traditional securitisations and their ability to attract new investors, making them an appealing tool for originators to optimize capital use.

Pedro Machado emphasized the global regulatory context for synthetic risk transfers (SRTs), noting their cross-border nature requires alignment with international standards.

The Basel Committee found that post-crisis reforms have simplified SRTs and increased supervisory scrutiny.

Risks, such as banks' dependence on non-bank financial institutions, are acknowledged and managed, but continued monitoring is needed due to market growth and disclosure blind spots.

The Bank for International Settlements (BIS) confirmed these findings, assessing main risk channels as modest but evolving.

The BIS highlights the need for greater information sharing between supervisors and a focus on rollover risk and procyclical behavior.

The ECB aligns with these international assessments, stressing continued risk monitoring if SRT issuance trends persist.