The Basel Committee on Banking Supervision today published a report on synthetic risk transfer (SRT) transactions. The economic importance of SRT markets has grown rapidly over the last decade and they have become an important source of capital relief for corporate credit risk.

SRT transactions involve transferring all or a portion of the credit risk of a pool of assets to a counterparty while the bank retains ownership of the underlying assets. The investor base in SRTs is dominated by private investment funds, although public sector entities also play an important role in some jurisdictions. Capital and credit risk management are the main motivations for banks to engage in SRTs.

Regulatory and supervisory reforms implemented since the 2008 Great Financial Crisis (GFC) make SRTs simpler and result in more scrutiny relative to credit risk transfer transactions in use before the GFC. Some jurisdictions and market participants believe there are blind spots related to disclosure and SRT financing activities.

The total value of protected assets in Canada, the euro area, the United States and the United Kingdom, jurisdictions in which SRT markets are particularly vibrant, is estimated at about EUR 750 billion, or 1.1% of total bank assets.

Risks associated with SRT use, such as banks' increased dependence on non-bank financial intermediaries (NBFIs), are acknowledged and, to some extent, actively managed by market participants. However, they merit continued monitoring by supervisors as SRT markets continue to grow.

The report is part of the Committee's continued monitoring and investigation of the interconnections between banks and NBFIs.

Re-disseminated by The Asian Banker