SRTs (Significant Risk Transfer), the new, rapidly growing “fashion” of European banking giants, are coming under the microscope of international regulators and central banks. This is an extremely complex financial tool through which credit institutions transfer the default risk of their loan portfolios to hedge funds and private equity funds.
While the strategy is a prime tool for banks to free up valuable regulatory capital, boost profitability and fund aggressive acquisitions, the ECB and the Financial Stability Board (FSB) are sounding the alarm…
Data compiled by Bloomberg show that about 11.1% (or $509 billion) of corporate loans at major European banks were tied to SRT transactions at the end of last year. That figure has nearly doubled since 2022, when it was 6.2%. The dollar total reflects the share that banks retained after transferring some of their exposure to loan losses.
Hedging European corporate loans through SRTs is the largest and most established segment of a broader market. With a value exceeding $1.5 trillion, this market also extends to regions such as North America and covers lending categories such as mortgages and auto loans.
Familiarity and growth
At some banks, adoption of the tool has been even faster. One of the key drivers has been to free up capital to fuel growth — either through new loans or acquisitions.
- At UniCredit, which is seeking to acquire Commerzbank in Germany, the share has jumped to 14% from less than 1% in three years.
- Austria’s Erste Group Bank, which acquired control of Banco Santander’s Polish unit in the largest acquisition in its history, was another big SRT issuer last year.
- Santander ended the year with 21% of its corporate loans hedged through SRTs. The Spanish bank maintained a similar pace to 2025 in the first quarter of this year, transferring about 10 billion euros in risk-weighted assets (RWA) through SRTs.
“Familiarity brings scale,” said Thanos Chonthrogiannis, chief economist at Trust Economics, an Athens-based research and advisory firm. “The more comfortable issuers are with the product, the more systematically they integrate it into their capital management tools and the more they issue,” he added.
How does the transactions work
In an SRT, investors agree to shoulder part of the potential losses from bad loans. These deals often protect banks from the first wave of defaults in a loan portfolio and typically cover between 5% and 15% of the total portfolio.
In return, buyers, such as hedge funds, pension funds and private credit funds, receive coupons that can exceed 10%. The deals are usually quietly concluded with a single buyer or a small group of investors. A recent European Central Bank working paper identified 65 non-bank investors in SRTs. Overall, this group holds almost two-thirds of the SRTs issued by European banks from 2018 to 2024.
Most SRTs are so-called synthetic securitisations, where the bank retains the original loans and effectively acquires the collateral, often by issuing a financial instrument known as a credit-linked note.
More than €1.3 trillion in assets (equivalent to about $1.5 trillion) were synthetically securitised between 2016 and 2024, the International Association of Credit Portfolio Managers (IACPM) said in July. A smaller share of the transactions involve traditional securitisations, in which loans are moved off the bank’s balance sheet.
European banks are taking the lead
European banks have taken the lead in using SRTs, encouraged by regulatory guidance, including a directive issued by the ECB in 2016. U.S. lenders such as JPMorgan Chase and Bank of America have also issued SRTs, but a shift toward looser capital requirements in the U.S. has reduced banks’ incentive to do more of them.
The deals are often corporate loans, but banks are increasing SRTs backed by mortgages, credit cards and other forms of debt. SRTs based on loans to large corporations or smaller businesses accounted for 47% and 14%, respectively, of all issuances in 2025, according to data from Crescent Capital Group, a unit of Sun Life Financial Inc.
Central banks’… bells ringing
Institutions such as the Bank of England (BoE), the ECB and the Bank for International Settlements (BIS) have warned of potential risks.
One concern is whether banks might struggle to replace maturing SRTs if credit markets freeze. That could discourage buyers, making SRTs so expensive that they would no longer be profitable to issue. The inability to renew existing securities could hurt capital ratios and force banks to cut back on lending, adding to the strain on the economy.
Another concern is how SRTs are financed. As more investors enter the market, yields have fallen, prompting buyers to boost their profits through borrowing (leverage). This circularity – where one bank sells risk while another provides leverage to SRT buyers – can reintroduce risk into the banking system.
In March, the ECB announced it was reviewing the extent to which banks fund investments in SRTs. Meanwhile, the Bank of England’s PRA updated its rules governing SRTs in January and asked Barclays plc, a major issuer, to review its procedures for risk transfer transactions.
Many argue that this boom has a long way to go. The market is likely to continue to grow at a similarly rapid pace.
