Strategies for Synthetic Risk Transfer Trades
Finadium
September 2024
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.
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.
This report looks at strategies for the SRT trade across regulation, trade structures, operations, investor types 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 should be read by any capital markets participant in products that entail the temporary transfer of risk and credit between counterparties.
Table of Contents
- Executive Summary
- What is Synthetic Risk Transfer?
- Regulatory Direction and Market Sizing
- – Private and Government Data
- Trade Structures and Mechanics
- – Variations on the Theme
- The Investors
- – Insurance Companies
- – Growth of Specialist Firms
- Options for Counterparty Credit Risk Management
- Growth Prospects and Cross-product Integration
- About Finadium LLC