Everything you need to know about Significant Risk Transfer

Significant Risk Transfer (SRT) transactions enable banks to reduce their regulatory capital requirements by transferring some of the credit risk attached to certain assets to third-party investors.

For banks, SRT is used to improve capital efficiency and manage risk without the need to raise fresh equity or sell assets.

For investors, SRT transactions are an opportunity to access large, diversified portfolios of high quality, bank-originated assets, such as corporate and consumer loans, which are a core banking business and not usually available for sale.

What is SRT?

SRT transactions are sometimes referred to as “synthetic” securitisations. This is because they are structured in a similar way to conventional asset-backed securities (ABS), but the assets remain on the bank’s balance sheet rather than being transferred to a special purpose vehicle (SPV).

Typically, the primary motivation behind SRT for a bank is to reduce its regulatory capital requirements. By transferring a significant portion of the credit risk attached to a pool of assets to investors, a bank can reduce the amount of capital it must hold against those loans, freeing up capital for further lending. Large corporate and SME loans tend to feature most frequently in SRT trades, for example, since they carry relatively high capital requirements.

However, banks can also use SRT for risk management purposes, if for example they wish to reduce their exposure to certain geographies, industries or asset types. 

How does SRT work?

SRT transactions are private and mostly unrated. Many are bilateral (one bank and one investor), though there are also “club” deals with 3-5 investors and some are more broadly syndicated.

SRT structures are relatively simple, but due to their private nature they are not standardised and vary from deal to deal according to the preferences of the issuer and the investor.

The basic features are:

•  A “reference pool” of assets is selected by the issuing bank. The assets are not sold, they remain on the bank’s balance sheet, but their credit performance is mirrored by the SRT.
• A mezzanine tranche is issued to the investor, with a senior tranche above that is retained by the bank and a first loss tranche that is subordinated to the mezzanine. The bank often retains this first loss tranche, but this can also be sold.
• Under SRT, the investor agrees to compensate the bank for any losses on the reference asset pool. The bank has transferred the credit risk of those assets to the investor which, pending regulatory approval, entitles the bank to capital relief; the bank is able to hold (lower) capital against the issued tranches rather than the underlying asset pool.
• In effect, the investor is selling credit protection to the bank on a portion of its assets. In return, the bank pays the investor a premium in the form of a coupon on the mezzanine tranche (comparable to a coupon on any other bond).

Unfunded vs. funded SRT

Unfunded SRT is used when the investor is an insurer or supranational institution with a high credit rating.

In this case the investor does not need to pledge collateral, as the bank can rely on the investor’s creditworthiness to justify capital relief. The absence of pledged collateral makes unfunded SRT simpler, cheaper and more flexible, but leaves the bank exposed to the risk of the credit protection provider being downgraded or defaulting, which could lead to the termination of the SRT’s capital relief.

Funded SRT is used when the investor is a lower rated counterparty such as an asset manager, a specialist credit fund or a weaker insurance company.

In this case the bank will request collateral in the form of a cash deposit or highly liquid securities, to mitigate the counterparty risk and reduce the capital requirements attached to the exposure (see Exhibit 1). To avoid the need for a trustee or custodian to manage this collateral, the bank may issue the mezzanine tranche in the form of a credit-linked note (CLN). The issuance proceeds of the CLN are placed into a collateral account. The cash is used to cover any losses from the reference pool over the life of the deal, with the principal due to the investor at maturity reducing accordingly.

What’s behind the growth in SRT?

Banks have been using SRT to reduce their risk weighted assets (RWAs), which determine their regulatory capital requirements, since the 1990s. Unusually for a financial market, growth has been far quicker in Europe, with activity in the US only picking up in recent years.

The rapid evolution of the European market in recent years is directly linked to the way EU banking regulations have developed.

• 2013 – The key framework for assessing capital relief through SRT is introduced via the Capital Requirements Regulation (CRR).
• 2014 – The European Central Bank (ECB) becomes “single supervisor” for all large EU banks, simplifying bank-regulator engagement over SRT transactions.
• 2017 – European Banking Authority discussion paper creates a common understanding of the criteria for capital relief under SRT, giving banks more predictability of outcome before executing transactions.
• 2021 – The EU extends the Simple, Transparent and Standardised (STS) securitisation regime to certain SRT transactions, making them more capital efficient for banks.
• 2025 – The ECB introduces a fast-track process for assessing standardised SRT transactions.

Between 2016 and 2024 an estimated 650 transactions were issued by 51 banks globally, referenced against over €1.3tr of underlying assets, with European banks accounting for more than 50% of that activity (see Exhibit 2). 

SRT issuance is expected to grow further as more banks, supported by regulators, use the technique for balance sheet optimisation. Banks have been given fresh motivation by the coming finalisation of the post-2008 Basel regulatory framework, which will introduce so-called “output floors” on different asset categories and likely increase banks’ RWAs.

What kind of assets are used in SRT?

SRT can be particularly capital efficient for banks when applied to assets that carry relatively high capital requirements in comparison to their historical credit performance.

SRT transactions have historically been predominantly backed by corporate assets (see Exhibit 3), but market growth and regulatory change is driving expansion into mainstream consumer assets such as mortgages and auto loans.

Why do banks use SRT vs. ABS?

SRT transactions use the same securitisation technology as conventional ABS, but banks use the two methods for different purposes (see Exhibit 4).

The key difference in terms of motivation is that banks use public, broadly syndicated ABS transactions predominantly for funding – i.e., the proceeds from the ABS are used to fund ongoing business and reduce the cost of lending in markets such as mortgages and auto loans. SRT trades by contrast are primarily aimed at capital relief and risk management.

However, there are additional benefits of SRT for banks beyond balance sheet optimisation:

• Alternative source of capital – With the cost of raising capital via equity and subordinated debt markets such as Additional Tier 1 (AT1) having risen in recent years, SRT is a useful alternative for banks.
• Costs – Synthetic transactions tend to be relatively cheap to structure and issue for banks, particularly once the approval process with regulators has been established. Public issuance by comparison requires fees to external banks for the syndication process.
• Client relationships – Keeping loans on balance sheet can preserve relationships with key clients, who may have multiple touchpoints with banks and will want their loan information to remain confidential.

What is the typical investor base?

Specialist credit funds have historically accounted for a significant proportion of the demand for SRT transactions (see Exhibit 5).

However, their share has fallen in recent years as the evolving regulatory backdrop has attracted a broader investor base, with increased appetite from asset managers and credit risk insurers.

What’s the appeal for investors?

The private, unrated and less liquid nature of SRT favours experienced investors, and existing relationships with issuing banks can also be key to accessing and structuring deals according to investor preferences.

Broadly speaking, SRT notes offer similar yields to BB or B rated collateralised loan obligations (CLOs). And like CLOs, the floating rate coupons in SRT tend to compare favourably to other credit products with similar risk profiles.

Other potential benefits include:

• Access to core bank assets – SRT issuers tend to be large banks with long track records, and robust risk management. Investors gain access to top-tier borrowers via assets that wouldn’t otherwise come to market. Without owning the assets, CLN holders get the protection of a set maturity without the potential market risk involved in selling assets at the end of the deal.
• Diversification – Historically around 80% of SRT reference pools have been corporate loans, but market growth and regulatory changes are increasingly driving expansion into mainstream consumer assets like mortgages and auto loans. Esoteric assets such as renewables, agriculture and more bespoke transactions also regularly feature.
• Targeted exposures – Like ABS, the exposure SRT offers to specific asset pools can be a powerful tool in portfolio construction and risk management for fixed income investors.

What are the risks of SRT?

Like all credit investments, SRT holders are exposed to default risk, with the issuing bank recovering any losses on the reference pool from the investor’s principal. Expertise in analysing securitisation structures and pools, and an understanding of a broad range of asset types, is critical.

Other key risks include:

• Counterparty risk – SRT coupons (and principal in some cases) are paid by the bank rather than directly by cashflows from the asset pool as they are in conventional cash securitisations. Bondholders in conventional ABS, where the bank sells the asset pool to an SPV, do not have the same exposure to the financial health of the issuing bank.
• Call risk – SRT transactions can be called (ended early) by the issuing bank if current or future regulatory treatment, or poor structuring, renders the intended capital relief ineffective. Call risk is potentially widespread across multiple deals in the event of a regulatory shift.
• Liquidity risk – SRT deals are typically private, unrated and with limited syndication, meaning liquidity is generally lower than in public ABS, though secondary markets may mature as the market expands.