Synthetic Risk Transfers Draw Interest from U.S. Banks

Grappling with high interest rates and related balance-sheet management issues, U.S. banks are eyeing deals that transfer their credit risk while keeping loans on their books along with the borrower relationships.

Several banks in the U.S. have entered into these synthetic risk transfers (SRTs), which are typically unrated. Such transactions are known as significant risk transfers in Europe, where they have been more routinely used, mainly to transfer risks on commercial real estate loans to alternative credit funds.

JPMorgan completed several private deals last year as U.S. regulators mulled changes to regulatory capital requirements. Last September, a Frequently Asked Questions document clarified how the Federal Reserve Board would treat credit-linked notes (CLNs), a type of SRT, issued directly by banks rather than through a special purpose vehicle (SPV) trust, the more traditional route.

Later in 2023, the central bank approved favorable capital treatment for four banks to directly issue CLNs under specific conditions, although none has acted so far. Letters from the Fed referenced auto loan SRTs for U.S Bank, Santander Bank...