The growing market for Significant Risk Transfer trades

November 26, 2020

by Panos Mizios Director, Financial Services Lead Advisory, PwC UK

Email +44 (0)7739 877229

by Chris Tongue Associate Director, PwC UK

Email +44 (0)7753 461482

From investors looking for alternative sources of yield, to banks looking for ways to manage their capital, now could be the time to assess synthetic risk transfer transactions (SRTs) as an option. In this blog we take a closer look at the forces making SRTs increasingly attractive and the likely impact of non-traditional players entering the market.

Synthetic risk transfer transactions have traditionally been limited to a relatively private market, dominated by a small group of specialist SRT funds and a handful of large issuing banks with recurring SRT programmes. But we’re seeing the market expand as new players start to show interest, and we expect it to become more efficient and competitive as a result.

The SRT market remained relatively resilient during the first wave of the COVID-19 pandemic,with over 25 new issuances coming to market from UK and European banks between May and October, and we have already seen pricing begin to normalise to pre-COVID-19 levels. This alone suggests SRTs are an increasingly attractive option to banks across the UK and Europe, further strengthened with the European Banking Authority actively supporting SRTs as a more widespread tool to efficiently manage capital.

On the buy-side, there is growing demand from an increasingly diverse pool of investors on the hunt for alternative sources of yield. On this basis, we expect to see institutional investors, particularly insurers and pension funds looking to invest in SRT structures.

Similarly, on the sell-side, smaller and mid-tier banks are starting to explore new tools to manage their regulatory capital requirements. SRTs offer an efficient way for them to manage their credit risk while still maintaining those client and borrower relationships and the underlying loan economics, also providing an alternative to direct loan portfolio disposals. The end to the government COVID-19 support schemes will undoubtedly translate into further pressure on banks’ capital and profitability so they may also look to SRTs as a way to efficiently release and redeploy capital into more profitable areas of lending, helping them to boost return on equity.

We have been having a number of discussions with small and medium sized banks across the UK and Europe as part of our work with them on balance sheet and capital optimisation strategies, and as yet, only a small number of them have considered an SRT as a way to manage their capital.

We expect this will change as the market expands and becomes even more efficient in the long term. Alternative investors with lower return requirements will begin to invest, and those smaller banks on standardised models will start to become more aware of SRTs as an efficient and viable option to optimise their capital. It is certainly worth staying informed as these changes continue.

If you’d like to know more about balance sheet and capital optimisation strategies, including SRTs, please get in touch.

by Panos Mizios Director, Financial Services Lead Advisory, PwC UK

Email +44 (0)7739 877229

by Chris Tongue Associate Director, PwC UK

Email +44 (0)7753 461482