The Bank for International Settlements published a BIS Quarterly Review article examining the rise of synthetic risk transfers (SRTs) used by banks for capital and credit risk management. The review finds that issuance has grown rapidly and strengthened links between banks and non-bank financial institutions (NBFIs), while risks appear modest for now but could increase as the market expands, structures become more complex and reliance on NBFIs for credit protection grows. Issuance has increased fivefold since 2016, providing protection to loan portfolios of almost EUR 800 billion as of end-2024 and bringing the number of issuers above 100, with European banks still dominating but increasing activity among North American peers. Even so, SRTs protected around 2% or less of total bank loans in the European Union, United States, United Kingdom and Canada at end-2024, and delivered around 43 basis points of Common Equity Tier 1 (CET1) capital relief on average for issuing banks. The article highlights potential systemwide channels including rollover or flowback risk that can amplify procyclicality in bank lending, leverage and liquidity vulnerabilities among investors, and increasingly complex cross-border risk transfer chains that can create feedback loops between banks and NBFIs; limited disclosure and fragmented cross-sector data are presented as key obstacles to detecting vulnerabilities, supporting calls for greater transparency, enhanced monitoring and use of system-wide stress testing to assess spillovers.
Bank for International Settlements 2026-03-16
Bank for International Settlements analyses synthetic risk transfer growth and flags need for enhanced monitoring
The Bank for International Settlements' Quarterly Review highlights the rapid growth of synthetic risk transfers (SRTs) for capital and credit risk management, noting a fivefold increase since 2016. SRTs have provided significant protection to loan portfolios, covering nearly EUR 800 billion by end-2024, but still protect only a small fraction of total bank loans. The review underscores potential systemic risks, such as procyclicality and cross-border complexities, and calls for enhanced transparency and monitoring to address these vulnerabilities.