European banks' outstanding significant risk transfers (SRTs) look poised for further growth in 2025.   This follows a 15% increase in 2024, as indicated by regulatory filings. Despite geopolitical uncertainty, investor demand remains strong and provides opportunities for banks to manage their credit portfolios, optimize capital requirements, and enhance returns on equity. The region's largest lenders dominate transaction activity, but issuance is becoming broader based as the growing investor base and favorable pricing attract more banks to the market.

Chart 1

Background In Brief

Banks' disclosures on retained SRT tranches are a reasonable indicator of outstanding issues because transaction structures are similar--but not identical--across the region. European SRTs are mostly bilateral, synthetic deals in which issuers typically retain the senior tranche representing about 80%-95% of the reference portfolio and sometimes a small first-loss tranche covering the expected losses on the reference loans. They usually sell a mezzanine tranche that is generally up to about 15% of each deal and transfers most unexpected losses on the portfolio to the protection provider.

What's Happening

Favorable pricing incentivizes new issuance.   Pillar 3 disclosures for a sample of 40 rated European banks show that their aggregate retained SRT tranches increased by 15% during 2024. Santander is the region's most active originator as SRTs are a tool in its asset mobilization program, and other national champions complete the top 10 (see chart 2). Various banks including BBVA, Erste, and NatWest reported notable increases in outstanding SRTs in 2024, and AIB and DNB completed their first synthetic transactions.

Chart 2

Raiffeisen Bank International is the most active originator in our sample relative to balance sheet size.   Banco Comercial Português, Banco BPM, and Bank of Ireland also feature in the top 10 according to the amount of retained SRT tranches as a proportion of total private sector credit exposures (see chart 3).

Chart 3

Why It Matters

We see well-designed SRTs as an effective capital and risk management tool.   They have a proven track record in transferring credit losses on reference loan portfolios to third-party investors. Most European SRTs are funded structures in which investors collateralize their potential obligations under the transactions. We do not see a material risk of a bank becoming overly dependent on SRTs in view of the limited market size, regulatory constraints including the leverage ratio requirement, and the availability of similar tools such as credit insurance.

Regulators take a broadly constructive approach to SRTs.   For example, the European Central Bank (ECB) recently developed a fast-track process to assess new transactions. The U.K. Prudential Regulation Authority (PRA) has also proposed to join the ECB in recognizing unfunded SRTs, which are generally sold to highly rated investors such as supranationals and insurers. At the same time, regulators are paying close attention to bank financing of SRT investors, and the PRA raised concerns that banks may be undercapitalizing such transactions in view of the illiquidity of the underlying SRT tranches. Although there is a lack of comprehensive data, we do not currently see material leverage in the European SRT market, where the junior tranches sold to investors typically require sizable haircuts and frequent margining in repo transactions.

What Comes Next

We expect further growth in SRT activity this year assuming pricing remains favorable amid geopolitical uncertainties.   First-time issuance involves sizable fixed technology, legal, and accounting costs that incentivize repeat transactions. Still, larger issuers may be approaching maturity in terms of the stock of outstanding transactions. For example, Barclays has indicated that it expects to maintain its Colonnade corporate loan SRT program around the current level. Future market growth may therefore be driven by banks that have completed fewer transactions to date. One of several examples is Commerzbank's announcement in its February 2025 capital markets day that it intends to expand regulatory capital relief from SRTs.

Spread tightening has made SRTs an attractive proposition for many issuers.   Santander noted in its February 2025 earnings call that new transactions under its asset mobilization program had an average cost of equity of about 8% in 2024, which is well below banks' cost of capital. SRT pricing remained relatively favorable to issuers through recent market volatility, but spreads could potentially widen as supply increases, investor appetite evolves, and regulatory requirements change. Spreading the maturity profile of SRT transactions helps banks to manage refinancing risk in the event that new issue pricing becomes less attractive.

We see growing interest in credit ratings on investment vehicles holding SRT portfolios.   Credit tranching in these vehicles could enable protection providers to add leverage (see “ABS Frontiers: Asset-Based Finance Funds Are In Vogue,” published on Feb. 24, 2025)

Related Research

• ABS Frontiers: Asset-Based Finance Funds Are In Vogue, Feb. 24, 2025
• Credit FAQ: How Are North American Banks Using Significant Risk Transfers?, Nov. 12, 2024
• Banking Brief: Barclays And Santander Lead European Banks’ Significant Risk Transfer Activity, Nov. 6, 2024
• ABS Frontiers: The Credit DNA Of Synthetic Risk Transfer Securitizations, Sept. 3, 2024
• ABS Frontiers: Looming Basel 3.1 Rules Could Incentivize More Bank Securitization, June 3, 2024
• Banks Ramp Up Credit Risk Transfers To Optimize Regulatory Capital, Feb. 22, 2024

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