European Banks Embrace Risk Transfer Techniques
Barclays and Raiffeisen Bank International are leading the way among European banks in employing innovative methods to transfer credit risk and lower capital requirements, according to insights from global regulators.
The Basel Committee on Banking Supervision has highlighted that banks are increasingly opting for risk transfer transactions, allowing them to shift part of their credit exposure to outside investors. This practice is introducing new potential risks into the financial system, as noted in a report released on Tuesday.
Banks in the United States, Canada, the UK, and the euro zone have utilized what’s known as synthetic risk transfer (SRT) to de-risk loan portfolios totaling around 750 billion euros, which equates to roughly 1.1% of total assets.
Interestingly, the annual count of new SRT transactions within the EU has surged more than threefold from 2016 to 2024. The agency mentioned that changes in regulations after the 2008 financial turmoil have made it easier for banks to engage in these kinds of transactions.
The commission pointed out that some regions and market participants perceive potential gaps in disclosures and activities related to SRT fundraising. While the current volume of issuance remains modest, expectations are that the use of SRTs will continue its upward trajectory.
However, as more SRTs are issued, new challenges emerge. For instance, banks may become more reliant on external investors, which could expose them to market volatility and make loan provisions increasingly dependent on the stability of non-bank entities.
The report also brings attention to the fact that investors might improve returns by borrowing from sources apart from the issuing bank, raising previous concerns about “round trips,” which could shift risks away from the banking sector.
The report cautions that “SRT financing transactions may allow investors to leverage both the tranche structure and the financial leverage offered by funders.” Last year, British regulators warned major financial institutions that banks relying heavily on leveraged SRT transactions would face heightened scrutiny.
As noted in the report, Barclays has emerged as a significant user of SRTs to shift risk related to corporate loans across banks in the EU, UK, and Switzerland. UK banks are utilizing these transactions to de-risk about 45% of their corporate lending portfolios.
Barclays operates a well-established SRT program called Colonnade, which aids in mitigating many of the risks associated with its corporate loan books in the UK and the US. The bank has previously asserted that the deal is fully funded, with investors having committed collateral upfront to cover potential losses.
According to the report, Austria’s Raiffeisen has become the largest SRT user for reducing overall capital requirements among EU, UK, and Swiss banks, with Austrian financial institutions employing SRT to decrease their capital requirements by over 1% of common equity Tier 1 capital, a crucial measure of a bank’s financial soundness.
The Basel Committee, which comprises central bankers and financial regulators worldwide, suggested that SRT’s role in enhancing the connectivity between banks and non-banks might warrant closer collaboration and coordination among regulators.
To mitigate the potential risks of over-dependence on SRTs, the report proposes implementing supervisory tools and limitations on the percentage of loans supported by SRTs, as well as the capital relief attained through their usage. Yet, the committee acknowledged that, when compared to the securitization vehicles previously leveraged by banks for mortgage and leveraged loan repayments—often criticized for contributing to the 2008 crisis—SRTs seem to be more thoughtfully structured and managed by both banks and investors.
