European Banks Increase Leverage of Risk Transfer, Raising Regulatory Concerns
European banks are increasingly utilizing synthetic risk transfers (SRTs) to offload credit risk and reduce capital requirements, a practice that is drawing scrutiny from global regulators. While SRTs can offer benefits, concerns are rising about potential risks to financial stability and increased interconnectedness between banks and non-bank entities.
Growth of Synthetic Risk Transfers
The Basel Committee on Banking Supervision reported that banks in the US, Canada, UK and the Eurozone have used SRTs to offload risk on approximately €750 billion of loan portfolios, representing about 1.1% of their total assets. In the European Union, the volume of new SRT transactions more than tripled between 2016 and 2024. Financial Times
Key Players and Usage
Barclays Bank is identified as the most intensive user of SRTs for transferring the risk of corporate loans among EU, UK, and Swiss banks, offloading risk on roughly 45% of its corporate loan book. Financial Times This is facilitated through Barclays’ established Colonnade program, which fully funds transactions with upfront collateral from investors.
Austria’s Raiffeisen Bank International is the largest user of SRTs for reducing overall capital requirements, achieving a reduction of over 1 percentage point of common equity tier 1 capital – a key measure of financial strength.
Regulatory Concerns
The Basel Committee highlights potential “blind spots” related to disclosure and financing activities within SRTs. Increased reliance on external investors could leave banks more vulnerable to market fluctuations and impact credit provision if non-bank entities face difficulties. The committee also notes that investors can amplify returns through borrowing, potentially leading to “round-tripping” where risk isn’t truly transferred outside the banking system.
UK regulators have already warned lenders relying on leveraged SRT transactions to expect increased scrutiny. The Basel Committee suggests supervisory tools, such as limits on SRT coverage or capital relief, could mitigate over-reliance on these transfers.
SRTs Compared to Securitization
Despite the concerns, the Basel Committee notes that SRTs appear to be more prudently structured and managed than the securitization vehicles used before the 2008 financial crisis, which were widely blamed for exacerbating the crisis.
Looking Ahead
The Basel Committee emphasizes the need for closer cooperation and coordination among supervisors to address the increased interconnectedness created by SRTs. As the use of SRTs continues to grow, ongoing monitoring and potential regulatory adjustments will be crucial to maintaining financial stability.