Concerns About Credit Risk in SRTs Are Growing

 Market participants are growing increasingly concerned about the credit risk from significant risk transfers, a type of capital relief for banks, amid warnings from watchdogs that they could pose a risk to financial stability.

A series of surveys show respondents have been negative or neutral since June on credit risk across multiple types of SRTs in the US and Europe, according to Structured Credit Investor, a financial information provider.

Global watchdogs have been monitoring the risk transfers because of the danger that the transactions, which are often bought by private credit funds, could make banks look stronger than they are. The Federal Reserve, Bank of England and European Central Bank have been discussing the market as part of a larger dialogue on the nexus of risk between traditional lenders and non-banks, according to a person with knowledge of the matter.

Banks use SRTs to offload part of the risk of credit losses from corporate and consumer loans, shifting that exposure to investors in return for regular payments. That frees up capital for the traditional lenders to lend in more profitable areas. Outstanding SRTs globally have reached around $70 billion, according to Chorus Capital Management, compared with around $50 billion a year ago.

The BOE’s Prudential Regulatory Authority is closely monitoring the risk transfers because of their growth but has yet to see anything troubling, the person with knowledge of the matter said. So far, losses have been modest and none of the UK transactions has seen banks taking a hit, they said, asking not to be identified discussing confidential matters.

Barclays Plc, for example, has only claimed about £250 million ($317 million) in credit losses on portfolios subject to risk transfer deals since 2016, the lender disclosed at the end of the second quarter.

Still, “such structures retain substantial risk within the banking system but with lower capital coverage,” the International Monetary Fund warned in a report last month.

Bloomberg Terminal users can click here for a detailed look at the synthetic risk transfers, a type of SRT, issued by lenders

New Investors

A surge in the number of new investors looking at the space is causing risk premiums to fall, meaning buyers are being paid less for taking on risk that some have less expertise in analyzing.

https://finance.yahoo.com/news/concerns-credit-risk-srts-growing-200000839.html