This is a practical introduction to credit risk transfer (CRT) and significant risk transfer (SRT) trades, which provides a starting point for new issuers and investors. Use it to help tackle the complexities of structuring and negotiating these innovative multi-party transactions.

Read Time

8 mins

Published Date

Aug 30 2024

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CRTs and SRTs are an asset class that help issuers achieve capital relief in jurisdictions from Europe to the U.S. and beyond. They involve the transfer of credit risk on a portfolio of assets – typically from a bank to a third party, non-bank investor. We help clients confront regulatory challenges, establish successful partnerships, and ensure they have the right data and IT systems to achieve productive transactions.

SUMMARY

Banks, known as issuers, benefit from capital relief because they can transfer credit risk only, rather than all risks and rewards associated with the assets, and select which tranches to transfer.

For investors, it’s a leverage opportunity: they receive a premium they hope will outweigh any losses linked to defaults. It is also a way to diversify their holdings, and access harder to reach portfolios.

The guide sets out some typical CRT structures and describes how their different features align to the regulatory requirements for achieving capital relief.

A note on nomenclature

One of the major growing pains for this market is that no one can decide on a name. The product is known by different names in different places. This medley has developed for a variety of historic reasons, and can disguise the fact that we are all talking about the same thing:

- “Credit Risk Transfer” or “CRT”: This is the prevailing term in the United States, having been borrowed by the wider market from Fannie Mae and Freddie Mac’s mortgage risk transfer programs.
- “Significant risk transfer” or “SRT”: This, very technically, refers to a form of capital relief that can be achieved by tranched portfolio transactions. It is the usual label in the European market (sometimes irrespective of the actual capital treatment), and also encompasses cash SRT transactions.
- “Synthetic securitization”: This is the term used in the Basel framework. While it is in our view the most succinct description of what is really going on, market participants and regulators remain reluctant to embrace the “synthetic” label following the experience of the global financial crisis.
- “Credit risk-sharing trades”: A label to reflect the fact that the bank and the investor share in the portfolio risk together, this is the name preferred by a number of prominent investors.
- “On-balance sheet securitizations”: This refers to the fact that the assets remain legally owned by the originator, and is the name preferred by the EU regulators in recent legislation. We also see a number of other similar terms, including “synthetic risk transfer” and “capital relief trades”.

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