How scary are synthetic risk transfers?

SYNTHETIC risk transfers (SRTs) have recently started raising eyebrows. First introduced in Europe in the early 2000s as a niche form of regulatory capital optimisation, they have since evolved into one of the most important tools in modern bank balance sheet management.

Since 2016, banks have executed SRTs referencing more than US$1.1 trillion in underlying assets, with annual issuance worth tens of billions of dollars. As activity has climbed, and as private credit funds eagerly absorbed the contracts, regulators and financial journalists have grown increasingly vocal about their concerns.

The question is whether this scrutiny is warranted.