On 16 March, the Bank for International Settlements (BIS) published a paper on ‘The rise and risks of synthetic risk transfers’, which acknowledges that SRT-related risks are modest but highlights the need for more transparency and enhanced monitoring of these risks.

The paper adds that the growth in SRT issuance has facilitated the redistribution of risk from banks to non-bank financial institutions (NBFIs).

Its key findings are:

• SRTs have grown significantly in recent years. Issuance has increased fivefold since 2016, providing protection to loan portfolios of almost €800 billion as of end-2024. However, the SRT market remains small relative to bank balance sheets. In 2024, these instruments protected around 2% or less of total bank loans in the European Union (EU), United States, United Kingdom and Canada.
• SRT-related risks appear to be modest at present. However, the BIS emphasised that this may change as the market expands, structures become more complex and banks rely more heavily on non-bank financial institutions for credit protection.  The BIS acknowledged that SRTs demonstrated resilience during recent episodes of market turbulence.   Whilst moderate, the main risks identified in the paper are:

1. procyclical dynamics from banks’ reliance on NBFIs for credit protection;
2. leverage and liquidity vulnerabilities;
3. spillovers from bank-NBFI linkages.

• The SRT market has limited public disclosure and shows gaps in cross-sector and cross-border data. This is particularly the case for investor funding structures, leverage and interlinkages and raises the risk that SRT-related vulnerabilities build up unnoticed. The BIS said that there is a need for more transparency and enhanced monitoring of these risks for individual banks and from a system-wide perspective.

For more information, please contact Guillermo Pérez Molina, Private Credit Associate.