Significant Risk Transfer Deals May Be Subsiding, but Supervisory Attention Is Not

Following a meeting in March, the Basel Committee on Banking Supervision cited its ongoing work in such areas as “lessons learned” from the 2023 banking turmoil, technology risk and resilience, and “banks’ interconnections with non-bank financial intermediation (NBFI).”

As part of the latter assessment, the committee said it intended “to conduct over the coming year a deep-dive investigation on synthetic risk transfers (SRTs),” which banks use to transfer their credit risk while keeping loans on their books and maintaining the borrower relationships.

SRTs – historically known in Europe as significant risk transfers – have grown in the U.S. in the form of credit-linked notes (CLNs) or credit default swaps (CDS). Two-thirds of the $1.1 trillion in synthetically securitized assets since 2016 were in Europe, transferring primarily corporate loan risk, while U.S. banks have focused on auto and other retail loans, according to the October 2024 Global Financial Stability Report of the International Monetary Fund, another global body that is weighing in.

Banks’ use of the instruments appears to be waning, although some multinational banks...