(May 26): Banks are going big on a product that’s drawing ever-closer regulatory scrutiny.
Lenders have stepped up their reliance on so-called significant risk transfer (SRT) trades, complex deals in which banks offload some of the default risk from their loan books to hedge funds and other investors.
SRTs are booming because they helps banks free up capital and boost measures of profitability. But the fast expansion of the market is also prompting authorities to seek greater oversight — and to better understand what risks or contagion could emerge if bad loans surge.
“Rapid growth in SRT issuance naturally attracts regulatory interest, especially in a market lacking standardisation and transparency,” said Bill Ledger, a consultant and former head of the credit portfolio group at JPMorgan Chase & Co.
“While regulators are clearly supportive of such trades, it feels appropriate they consider how banks are managing rollover risk, counterparty risk and the provision of financing to SRT investors,” he said.
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Data compiled by Bloomberg shows that about 11.1%, or US$509 billion, of corporate loans at Europe’s major banks were tied to SRT trades at the end of last year. This ratio has nearly doubled since 2022, when it stood at 6.2%.
The dollar total reflects the portion retained by banks after offloading their exposure to some loan losses.
Hedging European corporate loans through SRTs represents the largest and longest-established part of a broader market. Worth more than US$1.5 trillion, this also spans regions like North America and lending categories such as property and auto loans.
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Familiarity
At some banks, the uptake has been even faster. One driver has been to free up capital to fuel growth — either via new lending or through takeovers.
At UniCredit SpA, which is seeking to buy Commerzbank AG in Germany, the ratio has surged to 14% from under 1% in three years. Austria’s Erste Group Bank AG, which bought control of Banco Santander SA’s Polish unit in its largest-ever acquisition, was another major SRT issuer last year.
Santander ended last year with SRTs hedging risks for 21% of corporate loans. The Spanish bank kept up a similar pace to 2025 in the first quarter of this year, offloading about €10 billion of risk-weighted assets via SRTs.
José García Cantera, the bank’s chief financial officer, told investors in April that investor appetite had grown, despite broader market unrest.
“Familiarity breeds scale,” said Frank Benhamou, head of SRT at Cheyne Capital Management UK LLP, a London-based investment firm. “The more comfortable issuers become with the product, the more systematically they incorporate it into their capital-management toolkit and the more they issue.”
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In an SRT, investors agree to shoulder some of the potential losses from soured debts. The agreements often protect banks against the first wave of bad debts in a loan book, and typically cover between 5% and 15% of the overall portfolio.
In return, buyers such as hedge funds, pension funds and private credit funds receive coupons that can top 10%. Deals are typically struck quietly with a single buyer or a handful of investors. A recent European Central Bank (ECB) working paper identified 65 non-bank investors in SRTs. Together, this group holds nearly two-thirds of the SRTs that European banks issued from 2018 through 2024.
Most SRTs are so-called synthetic securitisations, where a bank keeps the original loans and effectively obtains insurance, often by issuing an instrument known as a credit-linked note. More than €1.3 trillion of assets — equivalent to about US$1.5 trillion — were synthetically securitised between 2016 and 2024, the International Association of Credit Portfolio Managers said in July. A smaller share of deals are traditional securitisations, in which loans are shifted off the bank’s balance sheet.
European banks have taken the lead in using SRTs, encouraged by direction from regulators, including ECB guidance issued in 2016. US lenders such as JPMorgan Chase and Bank of America Corp have also issued SRTs, but a shift towards looser capital US requirements has reduced banks’ incentives to do more deals.
Trades often involve corporate loans, but banks are stepping up SRTs backed by mortgages, credit cards and other kinds of debt. SRTs based on loans to corporations or smaller businesses made up 47% and 14%, respectively, of all issuance in 2025, according to data compiled by Crescent Capital Group LP, a unit of Sun Life Financial Inc.
‘Appropriately engaged’
Institutions such as the Bank of England, the ECB and the Bank for International Settlements have warned about potential dangers.
“Volumes are rising quickly, and when this happens the interconnections between banks and the non-bank financial sector deepen in ways that are not always fully mapped,” said Pedro Machado, a member of the ECB’s supervisory board, in a May 14 speech. While the market is functioning well, better data is needed, Machado said, adding that governance and risk management at banks must keep pace with the rapid growth.
One concern is whether banks might struggle to replace maturing SRTs if credit markets seize up. That could deter buyers, making SRTs so expensive that they are no longer worth issuing. A failure to roll over outstanding instruments could eat into capital ratios and encourage banks to cut back lending, potentially adding to strains on the economy.
Another worry: how SRTs are financed. As investors have crowded into the market, returns have fallen, prompting buyers to juice returns with debt. That circularity, where one bank sells risk while another provides leverage to SRT buyers, can reintroduce risk into the banking system.
Santander chief financial officer José García Cantera says investor interest in significant risk transfer trades has grown.
Bank lending to private credit funds and other shadow banks that buy SRTs “could create ‘circles of risks,’” the Financial Stability Board (FSB) cautioned in May. The FSB, which convenes global central banks, finance ministries and regulators, said authorities should track SRT holdings by private credit investors, and bank lending to these funds.
In March, the ECB said it was probing to what extent banks are financing investments in SRTs.
For its part, the BOE’s Prudential Regulatory Authority (PRA) updated rules governing SRTs in January, stressing that banks’ senior managers should be “appropriately engaged” on any deals that cut risk-weighted assets. The PRA has also told Barclays plc, a major issuer, to assess its processes for risk-transfer trades, Bloomberg has reported.
Many say the boom has further to run. The market is likely to keep growing at a similarly rapid pace, said Pablo Sinausía Rodríguez, a former official at the ECB and the European Banking Authority. More and more banks are embracing SRTs as they seek to grow and boost shareholder returns, said Sinausía Rodríguez, who is now a director at Caboalto Ltd, a financial consultancy.
“There are few indications we have reached ‘Peak SRT’ issuance by European banks other than perhaps for the largest issuers,” said Ledger, the former JPMorgan banker.
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