Significant risk transfers (SRTs) have been used by banks for decades to share the credit risk of portfolio of loans with third-party investors, such as insurance companies, pension funds, and alternative investment funds. Top regulators regularly acknowledge the critical role SRTs play in mitigating risks and strengthening economic resilience.
Federal Reserve Chairman Jerome Powell recently told the Senate Banking Committee:
“It’s a good thing if a bank wants to transfer risk off its balance sheet …”
His remarks echoed what he told the House Financial Services Committee last summer, when he stated that the Fed examines SRTs “carefully” and “at the end of the day, if it works to reduce the risk on a bank’s balance sheet … that’s something we should be okay with.” More recently, Congressman John Rose (R-TN) reinforced this point, telling Powell:
“[Financial] institutions can take risk off their balance sheet … In the case of mortgage risk, [SRTs] have successfully shifted risk from taxpayers to private capital including capital markets and global reinsurers …”
MFA President and CEO recently addressed concerns about SRTs in a letter to the Financial Times:
SRTs “shifts risk from depositors with daily withdrawal rights and a taxpayer backstop to institutional investors with no run risk or government backstop … Curtailing the use of CRTs … would increase the risk present in the banking system.”
When subject to robust regulation and internal bank controls, SRTs provide:
- Capital efficiency: Help banks meet regulatory capital requirements by offloading risk, which supports capital adequacy standards.
- Liquidity: Enhance market liquidity by efficiently distributing risk across market participants.
- Market stability: Strengthen the financial system by reducing systemic vulnerabilities and promoting responsible risk-sharing.
To learn more about how SRTs are a critical tool for a resilient financial system, read our primer here.
