{"id":32722,"date":"2025-06-27T14:44:42","date_gmt":"2025-06-27T14:44:42","guid":{"rendered":"https:\/\/financialrush.com\/?p=32722"},"modified":"2025-06-27T14:44:42","modified_gmt":"2025-06-27T14:44:42","slug":"synthetic-risk-transfer-market-prompts-alarm-from-eu-banking-watchdog","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=32722","title":{"rendered":"Synthetic risk transfer market prompts alarm from EU banking watchdog"},"content":{"rendered":"<p> \n<\/p>\n<div>\n<p>Stay informed with free updates<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Simply sign up to the <!-- -->European banks<!-- --> myFT Digest &#8212; delivered directly to your inbox.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=4cef0d54-7a5f-4d6e-820a-db7f3e1461ca&amp;concept-id=738ba631-9a48-4b3f-9c5f-02a7cb9639d8\"><\/iframe><\/div>\n<div id=\"article-body\">\n<p>Europe\u2019s top banking regulator has raised concerns about the \u201ccircles of risk\u201d being created by banks providing financing to investors that are <a href=\"https:\/\/www.ft.com\/content\/b7729107-afb1-4fd7-bfd2-434d1ef7edbb\" data-trackable=\"link\">taking on credit risk<\/a> from other lenders.<\/p>\n<p>The European Banking Authority said in <a href=\"https:\/\/www.eba.europa.eu\/sites\/default\/files\/2025-06\/93431cb8-4877-4325-82f9-0a41ba71e45a\/Risk%20Assessment%20Report%20Spring%202025.pdf\" data-trackable=\"link\">a report<\/a> on Friday that it was \u201cparamount to understand\u201d whether loan exposures transferred out of the banking system through a fast-growing credit-transfer market were looping back through financing from other lenders.<\/p>\n<p>The EBA\u2019s concern stems from the <a href=\"https:\/\/www.ft.com\/content\/d91d35fc-93ab-4963-8587-7a00fe5c63b4\" data-trackable=\"link\">rapidly growing market<\/a> for significant risk transfers \u2014 also known as synthetic risk transfers, or SRTs \u2014 in which investors take on credit risk from a bank\u2019s loan portfolio in return for regular payments from the lender.<\/p>\n<p>Banks across the EU have been issuing increasing amounts of SRTs, which allow them to reduce the perceived riskiness of their balance sheets, freeing up capital to fund more lending or return to shareholders.<\/p>\n<p>The EBA said: \u201cIt remains paramount to understand whether banks are, for instance, investing in private credit funds or other [non-bank financial intermediaries] that then invest in banks\u2019 SRTs.\u201d<\/p>\n<p>\u201cThis could create certain \u2018circles of risks\u2019, as in the end a private credit fund\u2019s SRT investment would become an implicit risk for a bank that invests\u2009.\u2009.\u2009.\u2009in that fund.\u201d<\/p>\n<p>The warning reflects intensifying scrutiny of SRTs by global regulators. The IMF <a href=\"https:\/\/www.ft.com\/content\/a1745218-5beb-4fd3-81b1-db9c9a0a8e08\" data-trackable=\"link\">warned<\/a> last year about the risk of \u201cround-tripping\u201d as it pointed to \u201cevidence that banks are providing leverage for credit funds to buy credit-linked notes issued by other banks\u201d.<\/p>\n<p>The Bank of England <a href=\"https:\/\/www.ft.com\/content\/61c56050-cf99-4b66-bcb2-884b74e4eadd\" data-trackable=\"link\">said in April<\/a> that it had observed \u201can imprudent approach\u201d in how banks were classifying the financing they provide via repurchase agreements \u2014 or repo \u2014 to investors against the SRTs they buy from other banks.<\/p>\n<p>US Federal Reserve chair Jay Powell told the Senate banking committee in February it was checking \u201con a case-by-case basis\u201d to see if SRTs \u201creally do transfer risk successfully\u201d.\u00a0<\/p>\n<p>The EBA said SRTs made up just over half the \u20ac1tn of total securitisations issued by EU banks. Its survey of banks found more than half had used SRTs already and three-quarters aim to do so in future. SRTs cover about 2 per cent of all credit risk in EU banks.\u00a0<\/p>\n<p>Loans to small-and-medium-sized companies made up just over 30 per cent of the risk transferred through SRTs across the bloc. Loans to larger companies made up a similar proportion, while a quarter covered residential or commercial mortgages.<\/p>\n<aside aria-labelledby=\"aside-label\" class=\"n-content-recommended--single-story n-content-recommended--inset\" data-component=\"recommended\">\n<p class=\"n-content-recommended__title o3-type-body-highlight\">Recommended<\/p>\n<div class=\"o-teaser o-teaser--article o-teaser--small o-teaser--stacked o-teaser--has-image o-teaser--opinion js-teaser\" data-id=\"a942db4c-c769-4332-b39c-0e9072db4fc2\">\n<div class=\"o-teaser__image-container js-teaser-image-container\"><a href=\"https:\/\/www.ft.com\/content\/a942db4c-c769-4332-b39c-0e9072db4fc2\" data-trackable=\"image-link\" data-trackable-context-story-link=\"image-link\" tabindex=\"-1\" aria-hidden=\"true\"><\/p>\n<div class=\"o-teaser__image-placeholder\" style=\"aspect-ratio:2290\/1288\"><\/div>\n<p><\/a><\/div>\n<\/div>\n<\/aside>\n<p>SRTs seem to be helping banks increase shareholder distributions. The EBA said EU banks\u2019 dividends and share buy-backs were expected to rise from \u20ac92bn this year to \u20ac108bn next year, lifting their payouts from 51 per cent of total earnings to 55 per cent.<\/p>\n<p>Overall the EBA said the region\u2019s banking sector \u201ccontinues to show resilience\u201d after profits rose 9 per cent last year and capital stayed close to a record high with an average common equity tier 1 ratio \u2014 a key regulatory benchmark that measures a bank\u2019s financial health \u2014 of 16.1 per cent. But after non-performing loans rose from a recent low it warned \u201cgeopolitical events could pose significant challenges for the industry\u201d.<\/p>\n<\/div>\n\n<br \/><a href=\"https:\/\/www.ft.com\/content\/4cef0d54-7a5f-4d6e-820a-db7f3e1461ca\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Stay informed with free updates Simply sign up to the European banks myFT Digest &#8212; delivered directly to&hellip;\n","protected":false},"author":5,"featured_media":32723,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-32722","post","type-post","status-publish","format-standard","has-post-thumbnail","category-us","cs-entry","cs-video-wrap"],"_links":{"self":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/32722","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=32722"}],"version-history":[{"count":0,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/32722\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/media\/32723"}],"wp:attachment":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=32722"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=32722"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=32722"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}