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The European Central Bank has warned that it will take action if Eurozone lenders try to reduce their capital requirements too much through the use of the fast-growing market for sharing credit risk with investors.
The ECB said it would guard against “undue risk-taking and a weakening of resilience” from banks’ surging issuance of a securitisation product known as significant risk transfer (SRT), in which investors take on the credit risk from a portfolio of loans.
The warning from the ECB underscores rising concern among global regulators about the sharp growth in SRT issuance. The world’s banks have used this market to offload credit risk on more than $1tn of loans in the past decade, according to recent research by the IMF.
The ECB said it would take “adequate measures” if banks’ growing use of this area of the securitisation market raises “prudential concerns” as it presented plans to speed up approvals of SRTs by the 113 Eurozone lenders it supervises.
These transactions typically involve investors, such as hedge funds, insurers and credit funds, taking on the risk of losses from a loan portfolio in return for regular payments from a lender. The deals can cut the capital banks must allocate to the loans by 55 to 80 per cent, the IMF said.
European banks dominate the SRT market, making up about 60 per cent of global issuance in the first nine months of this year, according to data from SCI Analytics.
Many of the biggest issuers in the market this year have been European lenders, including Banco Santander, BNP Paribas, NatWest, Deutsche Bank, Crédit Agricole and UniCredit.
Activity has accelerated this year as banks try to offset the impact of higher capital requirements stemming from the EU’s introduction earlier this year of stricter rules agreed by global regulators at the Basel Committee on Banking Supervision.
Eurozone banks issued SRTs on €210bn of assets in 2024, up from €150bn the previous year, the ECB said. In the first half of this year, issuance rose more than 85 per cent from a year ago, ECB supervisory board member Pedro Machado said in a recent speech.
EU banks will be able to offload risk even faster under the ECB’s new fast-track approval process for banks’ SRT issuance and share buybacks that meet certain criteria. It aims to cut approval times from three months to two weeks.
The ECB has not set hard limits on banks’ SRT issuance but said its supervisors would focus on “complex cases” and monitor how banks assess risks from such transactions.
Claudia Buch, chair of the ECB’s supervisory arm, said in an interview with the Financial Times last month that SRTs can “have negative implications if the incentives are not right and if the risk is not really transferred but comes back to the banking sector in times of stress”.
The ECB last month called on the European Commission to adjust its planned securitisation legislation to tighten rules for reinsurers providing unfunded credit guarantees to banks as part of SRTs.
Global regulators discussed the rapid growth of the risk-transfer market at their meeting last month in Mexico. The Basel committee said in a statement after the meeting that while SRTs were simpler than credit risk-transfers used before the 2008 financial crisis, “it is important that banks and supervisors address potential risks stemming from such transactions”.
