SRTs allow banks to insure default risk by issuing credit-linked notes to investors such as pension funds, sovereign wealth funds, and hedge funds, among others. This helps lenders strengthen solvency ratios or unlock capital for growth. Typically, default protection covers 5% to 15% of the loan portfolio.
Since 2016, more than US$1 trillion in assets have been synthetically securitised, with growth led by US banks and established European issuers, according to an October report by the International Monetary Fund (IMF). Globally, SRT volumes are projected to expand 11% annually over the next two years, according to a Bloomberg Intelligence survey.
The IMF has expressed concern about a potential mismatch between short-term repurchase agreements, a form of leverage often used to acquire SRTs, and the typically longer-dated, less liquid credit-linked notes issued by banks. There are also significant gaps in data needed to monitor interconnectedness and financial stability risks, it said.
Uploaded by Liza Shireen Koshy
