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.
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.
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:
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.
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.
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.
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.
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:
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.
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:
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:
