Unlocking Potential With Significant Risk Transfer
Significant Risk Transfer – what is it and how does it help banks navigate the post-Basel environment?
In today's rapidly evolving financial landscape, banks and financial institutions are under increasing pressure to find innovative ways to optimize their balance sheets, improve capital efficiency, and manage risks. One tool for achieving these goals is Significant Risk Transfer (SRT), a mechanism that enables institutions to transfer a portion of their risk exposure to external investors.
This approach is gaining traction, particularly as European banks face mounting structural pressures to deleverage ahead of the stricter capital requirements set to take effect in 2025 under Basel IV, often referred to as the Basel “Endgame.” SRT solutions are emerging as a critical tool in this context, enabling banks to manage risks, meet regulatory requirements and position themselves for sustainable growth.
What Is Significant Risk Transfer (SRT)?
At its core, SRT is a structured financial transaction (securitization) that allows banks and lenders to transfer parts of the credit risk of a portfolio of loans or other assets to third-party investors, typically through the issuance of debt instruments (e.g. credit-linked notes) or via synthetic structures (e.g. guarantees). This risk transfer helps institutions reduce the regulatory capital requirements (RWAs) tied to the underlying assets while still maintaining the ability to service the loans.
SRT transactions can be applied to a wide range of underlying portfolios, such as corporate loans, SME loans and residential mortgages. Typical transaction sizes often range from several hundred million to a few billion euros, reflecting the scale of portfolios selected for risk transfer. These transactions can deliver substantial capital relief, with reductions in risk-weighted assets typically falling between 30% and 80% depending on the risk characteristics of the underlying assets and the transaction structure.
Why SRT?
Capital Relief
One of the most appealing aspects of SRT transactions is the capital relief they offer. By offloading risk, banks reduce the capital they are required to hold against certain assets, freeing up their balance sheet for new business.
Risk Mitigation
Banks can better manage their exposure by transferring a (significant) portion of the credit risk and reducing risks in certain industry sectors.
Improved Return on Equity
SRT transactions are designed to increase capital efficiency, allowing institutions to achieve better returns on equity.
Liquidity Management
SRT can be (if not synthetic) a powerful tool to improve regulatory liquidity ratios, such as the liquidity coverage ratio and net stable funding ratio.
Want to Know More?
Looking to make more out of your assets? Our Asset Based Finance (ABF) team is the right partner for all your activities regarding asset-secured financing.
The ABF product experts provide you with the full-service range, from conducting feasibility studies and picking the right structure, to the structuring, financing, and market placement with investors.
We build our product competence on extensive transactional experiences in a variety of Western European and CEE jurisdictions and innovative products ranging from classical ABS Structures (Auto/Consumer/Leasing) to Diversified Payment Rights and securitization transactions that optimize regulatory capital and refinancing strategies. To find out more about RBI’s most recent transaction, click here.
If you want to get in touch with our ABF team directly, please contact us at RBI-ABFFI@rbinternational.com.