BIS flags rapid growth in synthetic risk transfers

The Basel Committee on Banking Supervision has published a new report analysing synthetic risk transfer (SRT) transactions, highlighting that their economic importance has grown rapidly over the past decade. SRTs have become an important tool for banks seeking capital relief on corporate credit exposures, and now represent a significant segment of modern credit risk management practices.

According to the report, the total value of assets protected through SRT structures in Canada, the euro area, the United States and the United Kingdom is estimated at around €750bn, equivalent to about 1.1% of total bank assets in those jurisdictions. These four markets are described as particularly vibrant centres for SRT activity.

In a typical SRT, a bank transfers all or part of the credit risk on a defined pool of assets to a counterparty while continuing to own the underlying loans or securities. This contrasts with traditional securitisation, where assets are usually removed from the bank’s balance sheet. The Basel Committee notes that capital and credit risk management are the primary motivations for banks to employ these structures.

The report finds that the investor base in SRT transactions is dominated by private investment funds, with public sector entities also participating in some jurisdictions. This allocation pattern underlines the role of non‑bank financial intermediaries in absorbing bank credit risk via SRT markets.

Regulatory and supervisory reforms implemented after the 2008 Great Financial Crisis have materially affected how these transactions are structured and overseen. The Committee states that, compared with pre‑crisis securitisations, SRTs currently in use appear to be more prudently structured and managed. They are also subject to simpler rules and closer scrutiny under the revised prudential framework.

These post‑GFC changes are aimed at ensuring that risk transfer is genuine and that capital relief is commensurate with the degree of credit risk shed by banks. The report positions SRTs as part of a broader evolution in credit risk transfer markets rather than a mere continuation of pre‑crisis practices.

Despite improved structuring, the Basel Committee identifies several areas of concern that warrant supervisory attention. Some jurisdictions and market participants point to possible blind spots in public disclosure related to SRT activities, as well as questions about how SRTs are financed, including the terms under which investors fund their risk positions.

The report notes that SRTs increase banks’ interconnectedness with non‑bank financial intermediaries (NBFIs), since private funds are key risk‑takers in these markets. While the associated risks are acknowledged and in some cases actively managed by participants, the Committee concludes that the growing scale of SRTs justifies continued monitoring by supervisors.

This work forms part of the Basel Committee’s broader programme to assess links between banks and NBFIs. The Committee emphasises that ongoing surveillance of SRT markets will be important as they continue to expand and as their role in banks’ capital management strategies becomes more prominent.

In publishing the SRT analysis, the Basel Committee is acting within its mandate as the primary global standard setter for the prudential regulation of banks. The Committee provides a forum for cooperation on supervisory matters and seeks to strengthen regulation, supervision and banking practices with the aim of enhancing financial stability.

The Committee reports to the Group of Central Bank Governors and Heads of Supervision, which is chaired by Tiff Macklem, Governor of the Bank of Canada. The Basel Committee itself is chaired by Erik Thedéen, Governor of Sveriges Riksbank. Although its decisions have no formal supranational legal force, the Committee relies on the commitment of its member authorities to implement agreed standards in their domestic frameworks.