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The rise and risks of synthetic risk transfers

Author

Listed:
  • Prashant Babu
  • Michael Chui
  • Costas Stephanou

Abstract

Synthetic risk transfers (SRTs) are used by banks for capital and credit risk management. They have grown significantly in recent years but remain small relative to bank balance sheets. European banks have traditionally dominated SRT issuance, but their North American peers have seen an increase in issuance more recently. SRT-related risks appear to be modest at present. However, this may change as the market expands, structures become more complex and banks rely more heavily on non-bank financial institutions for credit protection. Limited and fragmented information heightens the potential for SRT-related risks to build undetected, highlighting the need for enhanced monitoring of risks for individual banks and from a systemwide perspective.

Suggested Citation

  • Prashant Babu & Michael Chui & Costas Stephanou, 2026. "The rise and risks of synthetic risk transfers," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:2603c
    as

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    References listed on IDEAS

    as
    1. Jeremy Brizzi & Jeffrey R. Gerlach & John Kelly, 2025. "Banking Trends: Synthetic Risk Transfers," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 10(3), pages 16-20, September.
    2. Pennacchi, George G. & Santos, João A.C., 2021. "Why do banks target ROE?," Journal of Financial Stability, Elsevier, vol. 54(C).
    3. Acharya, Viral & Cetorelli, Nicola & Tuckman, Bruce, 2024. "Where Do Banks End and NBFIs Begin?," CEPR Discussion Papers 18939, C.E.P.R. Discussion Papers.
    4. Jeremy Brizzi & Jeffrey R. Gerlach & John Kelly, 2025. "Banking Trends: Synthetic Risk Transfers," Banking Trends, Federal Reserve Bank of Philadelphia, vol. 10(3), pages 16-20, September.
    5. González, Fernando & Triandafil, Cristina Morar, 2023. "The European significant risk transfer securitisation market," ESRB Occasional Paper Series 23, European Systemic Risk Board.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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