Basel Committee dives into SRT
The Basel Committee on Banking Supervision is launching a "deep-dive investigation" into synthetic risk transfers – also known as significant risk transfers – following strong growth in recent years in banks' use of the securitisation technique to manage credit risk and capital requirements.
The international banking standards setter announced the review following meetings last Wednesday and Thursday to take stock of its work in light of a series of bank failures in 2023, when authorities in the US and Switzerland had to intervene after runs on Silicon Valley Bank, Signature Bank and Credit Suisse.
The probe into synthetic securitisations is part of the committee's work to assess the interconnections between banks and non-bank financial intermediaries. The committee said it would carry out the investigation over the coming year.
"While SRTs are not a new financial product, their use has grown and transactions structures have evolved in recent years," the committee said. "The investigation will seek to better assess the benefits and risks posed by SRTs."
SRT issuance reached a record high of about US$28bn-equivalent last year, according to one estimate, despite activity among US banks picking up more slowly than some had expected. The private nature of most SRT transactions makes it difficult to obtain accurate statistics.
The International Monetary Fund, in its Global Financial Stability Report in October, flagged the potential systemic risk of the technique by creating negative feedback loops during periods of stress, for instance through leverage provided by banks to investors in such transactions. Leverage can take the form of repo transactions or fund finance facilities.
Defenders of the use of leverage in synthetic securitisations say the risk is small because the structures are proven, banks provide leverage at conservative advance rates and leverage is usually only applied to lower-risk assets. Some investors also hold a cash buffer that can be draw in the event of a margin call. They point out that banks provide fund managers with the same kinds of leverage on much riskier assets such as equities.