The Synthetic Risk Transfer (SRT) market is growing, driven by high regulatory costs for banks taking on credit risk exposures. A new diversity of structured products, vendors and solutions are looking to reduce bank and client fees while optimizing the cost of balance sheet across capital markets. This Finadium report breaks down the rationale and structure for a new generation of SRT products.
SRT shifts the bank credit risk of a transaction to a third-party brokerage or end-investors. The bank balance sheet savings generated can be used to improve regulatory capital ratios, expand capacity, maintain a presence in a business segment that would otherwise generate sub-par revenues, return capital to shareholders, and strengthen client connectivity when providing loans. In addition to the capital benefits obtained from credit risk transfer, banks can manage their credit exposure to sectors and single name concentrations. The SRT trade is viewed as highly efficient in these regards.
Bank efforts have been helped by non-traditional, capital light institutions including wealth and asset managers, private capital businesses, public pension funds, alternative investments, sovereign wealth funds, insurance and re-insurance companies. SRT and bank loan portfolios offer clients an attractive, albeit risky, asset and a better way to match durations. For their part, banks want to reduce client dependence for keeping cash on the bank’s balance sheet, a trend evidenced in the move from simple deposits to money market funds. A transition to non-banking entities has implications for broader capital market and transactional activity as well, a fact not lost on the global regulatory community.
This report looks at strategies for the SRT trade across regulation, trade types, operations, investor categories and other options for credit risk management. It notes similarities between risk transfer in commercial loan-based activity vs. securities lending, repo and swaps, and how product overlap may continue over the next several years.
This report is based on conversations with leading market participants in the SRT space including non-bank vendors supporting transactions. The report should be read by any securities finance, collateral, balance sheet and derivatives professional for an introduction to the operations and mechanics of the trade, and ideas about how SRT may influence other markets and vice-versa going forward.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/strategies-for-synthetic-risk-transfer-trades/
For non-subscribers, more information is available here.