ECB approved 100% of risk transfers despite growing concern

The European Central Bank approved all applications to conduct so-called significant risk transfers in the last five years, despite growing concerns around the market.

Significant risk transfers allow banks to offload liabilities from their balance sheets by selling them as securities to third parties, freeing up capital for more lending.

This type of structured finance transaction was introduced as part of the Basel II framework and has been adopted by numerous jurisdictions, with the EU the largest market for synthetic securitisations, making up half of the global market at the end of 2023 according to the International Association of Credit Portfolio Managers.

In the Eurozone, SRTs need the ECB’s approval to ensure that enough risk has been transferred for capital requirements to be reduced.

According to data first obtained by Financial News and confirmed by The Banker, the ECB has not rejected any application for SRT since the beginning of 2020.

The ECB told The Banker that “supervisory dialogues” with banks mean transactions are adjusted to meet the regulatory conditions.

Regulators have warned that SRTs can artificially deflate the amount of capital banks need to hold, with the European Systemic Risk Board describing them as a potential “contagion channel”.

In a recent report, the European Banking Authority warned that the growth of the SRT market could be creating “circles of risk”.

Similar concerns have been raised by UK supervisors, with the Prudential Regulation Authority writing a letter to bank chief financial officers in April warning about the dangers of the practice.

The letter pointed to banks adopting an “imprudent approach”, including “the repackaging of illiquid assets into a tradeable format”.

The volume of SRTs issued in the Eurozone has doubled since 2020, with combined traditional and synthetic SRTs rising from €85.1bn to €167.8bn in 2024.

The European Commission has also proposed reforms to its Securitisation Regulation to boost the EU securitisation market (see Regulation Tracker).

The new framework suggested by the commission includes simplified reporting requirements and documentation exemptions for certain low-risk securitisations.

An S&P Global report in June stated that “significant risk transfer securitisations look poised for further growth in 2025 [as] investor demand remains strong”.

This growth comes as aspects of Basel II are being rolled back by global regulators, most notably in the US.

Supporters of SRT see it as positive for both banks, who can reduce their risk, and the wider economy, with more funding made available.

Lower regulatory requirements would free up capital for increased loan activity and greater dividend payments or share buybacks, benefiting shareholders.

To date, default rates in the EU have been negligible. A report from the ESRB in May however warned about a potential financial stability risk if the market grows beyond the current “small” amounts and if the use of SRTs remains opaque.

The report stated that “risk monitoring and assessment is needed”.

According to an International Association of Credit Portfolio Managers report, the outstanding amount of global synthetic securitisations was €614bn at the end of 2023, the most recent date global data available. The EU accounted for €299bn of this.