Roll over, SRTs: Regulators fret over capital relief trades

The European Central Bank has joined the growing chorus of regulators and policy-makers raising concerns about rollover risk in synthetic risk transfers (SRTs).

SRTs “need to be refinanced more frequently than traditional securitisations to preserve the risk transfer of the residual portfolio at the maturity of the protection, in the case the two do not coincide”, the ECB wrote in a November 11 opinion on proposed changes to European securitisation rules.

“Should issuance continue in line with current trends or even accelerate, the potential for financial stability risks to build up, and become substantial, could not be excluded.”

The European Banking Authority wrote about this risk in its Risk Assessment Report earlier this year. The European Systemic Risk Board, too, has flagged concerns. In October, the International Monetary Fund joined in with a working paper that also raised the issue.

Half of 85 banks surveyed by the EBA have made use of SRT already. Another fifth say they intend to. SRT deals allow banks to transfer the credit risk of pools of loans to hedge funds and other investors and so to free up capital for banks to lend more. If the price is right, banks can improve their capital ratios for less than it costs to issue equity capital.

You can easily get addicted to SRTs

Risk executive at a bank in Europe

Regulators have for some time worried that the investor base for SRTs might prove unwilling or unable to continue buying in times of trouble, leaving banks struggling to roll capital-relief deals they have come to rely on. The small number of investors that dominate the market has added to concerns.

Could issuers get hooked on capital relief that one day could become unavailable?

Many investors say fears about rollover risk are overblown – that specialist buyers are unlikely to turn away from the market during a period of stress, not least because their mandates are often to invest in these types of deals. SRT issuance continued even during the Covid pandemic in 2020, these people point out.

But bank risk managers may be slower to brush off concerns. “You can easily get addicted to SRTs,” says one risk executive at a bank in Europe. Banks risk running into “massive cliff effects” in which return on risk-weighted assets “suddenly plunges” because the bank cannot place SRTs anymore. “The risk is still yours,” he says.

Partly the concern owes to the untested nature of the market. Nobody can be entirely certain that SRT investor confidence would hold up in all circumstances. The default on an SRT by a large issuer could cause the market to “disappear at the worst point in time”, the bank risk manager suggests.

At the same time, investment in SRTs has remained concentrated among a small number of investors equipped with the necessary experience and expertise to engage in such complex transactions. According to a Moody’s survey in May, the single largest investor in SRTs in Europe held almost a third of outstanding exposures. The top three investors held nearly half. The top 10 held 76%.

Mitigation

Bank issuers can take steps to manage this risk, of course. The risk manager suggests three: more extensive stress-testing, caps on the portion of individual loan portfolios for which a bank will transfer risk, and some effort to diversify a firm’s investor base.

On stress-testing, the risk manager suggests a bank should model its risk-weighted assets based on a scenario in which the SRT market shuts, forcing the issuer to retain the risk on all loans to maturity, and perhaps some middling scenarios in which the ability to issue new SRTs becomes constrained.

Regarding caps, he suggests lower limits – perhaps 25% – for books of complex products such as leveraged loans, where risks are idiosyncratic and disputes more likely. SRT “should not be used excessively”, the risk manager says.

As for ensuring the stability of investors, here the risk manager draws a distinction between specialist SRT investors and institutional investors for whom SRTs are a small part of big portfolios: “Pension funds or insurance companies that use SRT to enhance yield as part of a very diversified investment portfolio are less exposed to concentration risk and can take losses on SRT.”

It’s worth noting here that others take the opposite view, and say opportunistic investors rather than SRT specialists would pull back from investing faster should markets become choppy.

Robert Bradbury, managing director at Alvarez & Marsal, says regulators are asking for some of these things already. “In the ECB and joint supervisory team submission for SRT deals and the questions we are getting back, it is now very likely they ask how a bank is treating its SRT issuance as part of a coherent strategy going forward, including anticipated volumes and frequency as well as how they go about replacing capital when it rolls off,” he says.

The PRA stated in its July 2025 supervisory statement on SRT that banks should consider the implications of securitised assets returning to their balance sheets and take into account both existing and “pipeline” transactions.

What else might banks do? Looking forward, new deal formats that could mitigate rollover risk are also possible, Bradbury says. Some investors may in future look to commit for a given percentage of a bank’s SRT issuance over several years, he suggests. The bank for its part might offer a degree of exclusivity as well as a more streamlined issuance process and would be able to demonstrate to regulators that investors were “locked in” for the long term.

Investors may brush off fears of rollover risk in SRTs. “It’s easy to be concerned about what could go wrong,” says one, but this is “fear of the unknown as opposed to fear of the known”. Bank risk managers might be less comfortable putting such unknowns aside.