The performance outlook for prime auto-loan securitizations this year is deteriorating, according to Fitch Ratings presale reports, as borrowers face macroeconomic headwinds, tariff uncertainty and labor market pressures. The portfolios backing the offerings are bifurcating, with some experiencing higher delinquencies and losses in recent vintages of loans, and others showing improvement.
Worsening portfolios could start to impact securitizations and significant risk transfers (SRTs) – also known as synthetic risk transfers – which are a way for banks to transfer credit risk and free up capital. SRTs have been used in recent years by regional and national banks in the U.S. mainly to off-load auto and other consumer-loan risk to third parties while retaining the assets on their balance sheets.
The trend could eventually result not only in pain for banks’ SRT counterparties but also for the banks seeking protection. Poor performance, according to a February analysis by the Basel Committee on Banking Supervision (BCBS), could make it more difficult or too expensive for banks to conduct SRTs and issue new ones. And if portfolio credit losses exceed projections made at the inception of SRTs, banks’ capital requirements on retained senior and mezzanine tranches could increase sharply.
Source: Basel Committee on Banking Supervision SRT report.
The BCBS estimated the total value of protected assets in the“particularly vibrant” SRT markets of Canada, the euro area, the U.S. and U.K. at €750 billion, or 1.1% of total bank assets.
"An SRT tranche essentially acts like insurance with a cap, so if losses exceed the detachment point of the tranche, when it becomes completely wiped out, then the senior tranche that the bank holds would suffer losses,” explained Som-lok Leung, executive director of the International Association of Credit Portfolio Managers (IACPM).
However, he added, the tranches are sized so that this would be very rare, otherwise regulators would not grant SRT, and thereby regulatory capital, relief. “It would have to be either a very extreme event, or the analysis used to structure the deal was faulty,” Leung said.
Significant counterparty losses could also make banks relying on those transactions more vulnerable to market volatility. BCBS noted that banks often intend lending relationships to last beyond SRTs’ maturity dates, but structuring new SRTs requires counterparties’ ongoing willingness to accept the credit risk. That would depend partly on the bank’s own performance as well as macro-financial developments that diminish investor appetite in bank-loan credit risk.
“These factors could make it difficult or prohibitively expensive for banks to conduct SRTs, especially if they arise together,” said the Basel Committee.
Experienced investors in SRTs such as hedge fund D.E. Shaw and PGGM, a pension-fund service provider, work closely with banks on the risk transfers. Other asset managers may be less loyal, such as relatively new ones that helped fuel the SRT market’s rapid growth in recent years but now must contend with concerns about their private-credit funds’ liquidity and credit issues, potentially diverting their focus and capital away from SRTs.
“Banks that heavily rely on SRTs to manage credit risk and their capital position could become vulnerable to market fluctuations and to shocks affecting the health of” nonbank financial institutions, BCBS said.
It found that “risks associated with SRT use are acknowledged and, to some extent, actively managed by market participants, but they merit continued monitoring as SRT markets continue to grow.”
In a March speech at the LBBW Fixed Income Forum in Frankfurt, European Central Bank supervisory board member Pedro Machado said ECB’s views on SRTs are “generally consistent” with the BCBS’s. He described “a growing mechanism for financial institutions to manage their balance sheets, release capital and – crucially – support the real economy by creating capacity for new lending. With this growth comes increased scrutiny and the need for a clear and robust framework.”
Pedro Machado
Machado noted that SRTs are cheaper to issue than traditional securitizations, new investors are powering the market’s growth, and banks are more likely to transfer risk of capital-intensive exposures, to optimize capital across their portfolios.
“This underlines why supervisors need to assess significant risk transfers in a broad prudential context, including how banks select loans and redeploy released capital, and how leverage and risk evolve after the transaction,” Machado said.
The ECB is surveying banks to analyze SRT practices “including the provision of funding by significant banks to investors in securitizations originated by other banks.”
In a May report on financial-stability vulnerabilities in private credit, the Financial Stability Board noted that banks sell a significant share of their SRT instruments to private credit funds. Many banks also lend to private credit entities, increasing their leverage and potentially creating “circles of risk,” where a private credit fund “ultimately becomes a risk for the bank providing the funding.”
These risks arise amid rapid SRT growth. In 2025, banks globally issued €30 billion of new SRT tranches on €378 billion in loans, increases of 35% and 21%, respectively, over 2024, according to an IACPM survey.
Most issuance was by European Union banks, which issued SRTs on €241 billion of loans in 2025, up 53% year-over-year. Much of the increase, according to Monsur Hussain, head of markets research at Fitch Ratings, can be attributed to recent streamlining of rules to issue SRTs. He also pointed out that SRTs enable banks to take a “scalpel-like approach to improving parts of their risk books, and improving capital velocity and lending.” It can be “much more economical” than issuing equity or other Tier 1 capital.
“If we see the [Basel III capital] rules go live in 2027 or 2028, our expectation is that SRT use in the U.S. will meaningfully increase, depending on the state of the economy,” Hussain said.
The Basel III re-proposal, however, does not necessarily favor SRTs over other strategies to reduce risk or increase capital ratios, the priority for most U.S. banks issuing SRTs in recent years.
“While the proposal makes it easier for a bank to issue an SRT, it also reduces capital requirements in general. So there is less pressure on banks to increase their capital ratios by doing an SRT,” said Matthew Bisanz, a partner at Mayer Brown.
Bisanz added that the re-proposal facilitates issuing credit-linked notes directly rather than through a special purpose entity, so “we may see more deals in the form of direct CLNs but are unlikely to see a material increase in overall volume.”