Overview
Banking regulators say banks are increasingly using tailored arrangements with private investment funds to shed portions of credit risk, a development that warrants close monitoring because it can generate fresh points of vulnerability for the financial system. The Basel Committee on Banking Supervision set out its concerns in a report released on Tuesday.
What synthetic risk transfers are
Known as synthetic risk transfers (SRTs), these transactions involve a lender transferring all or part of the credit risk on a portfolio of assets to third-party investors such as hedge funds or pension funds. The deals let banks free up regulatory capital while preserving their relationships with borrowers and other clients.
Recent growth and regulatory drivers
The committee noted that SRTs are not a new instrument, but activity has surged in recent years. In the European Union, new SRT transactions more than tripled between 2016 and 2024 after changes in EU rules granted certain synthetic securitisations preferential prudential treatment, the report said. Volumes in the United States also rose after regulators provided clarity in 2023 on how these deals should be treated for bank capital purposes.
Which banks use SRTs most
Among listed European lenders, Britain’s Barclays, Austria’s BAWAG and Greece’s Alpha were identified as the heaviest users of SRTs when measured against the size of their corporate loan books. On average, the committee found that listed banks employ SRTs to cover roughly 12% of their corporate loans.
Regulatory concerns
The Basel Committee cautioned that while SRTs can enable banks to expand lending that is subject to lower capital requirements, heavy dependence on such transactions exposes banks to the financial health of the non-bank investors that assume the risk. If those investors experience distress or withdraw from the market, the flow of credit could be disrupted.
"A contraction in credit caused by a protracted freeze in SRT markets could exacerbate an economic downturn and increase stress in the non-financial sector, possibly triggering an adverse deleveraging feedback loop," the committee wrote in the report.
Regulators are closely watching the growth of non-bank intermediaries involved in what is commonly called shadow banking because their activities often lack transparency and can introduce new risks that threaten broader financial stability.
The report also highlights additional concerns: growing ties between banks and non-banks - in some cases banks finance the very investors who buy the credit risk - opacity in the structure of individual deals, and signs of weakening underwriting standards. The committee said some of these risks are under surveillance and being addressed, but it recommended closer supervision as further expansion of the SRT market could multiply the vulnerabilities.
Market commentary and industry tools
Market participants have noted specific stock-level interest tied to these practices. One analytical product referenced in industry discussions evaluates Barclays (ticker BARC) alongside many other firms using more than 100 financial metrics. That tool claims to use AI to generate stock ideas and lists notable past winners, including Super Micro Computer (+185%) and AppLovin (+157%), while offering to identify whether BARC appears in any current strategies.
Conclusion
The Basel Committee’s report underscores a balancing act for regulators: allowing banks to use legitimate risk-transfer tools while ensuring that growth in bespoke SRTs and the expanding role of non-bank buyers do not create opaque channels of risk that could amplify stress across banks, non-bank investors and the wider economy.