The IACPM has conducted its annual survey on risk sharing transactions executed by banks through synthetic on balance-sheet securitizations. These transactions aim at capital release by “Significant Risk Transfer” (SRT) from their own lending book, contrary to true sale securitizations, which are mostly used as a source of long-term funding, or as collateral to central bank funding.
Contributing banks are the largest global and regional institutions which are regular users of this tool to release capital and support further lending growth. The vast majority (80%) of contributing banks are regulated based on the Internal Rating Based method.
Volumes increased between 2016 and 2022 : during this period, banks executed more than 400 transactions, protecting both expected and unexpected losses on close to € 800 Bn of underlying loans. By the end of 2022, € 500 Bn securitized loans were still covered by € 44 Bn of protected tranches (close to 9%) – among which 50% were granted in the EU, representing more than €40Bn of capital release. The year 2022 highlighted not only a substantial growth in product utilization by banks, with € 200 Bn new issuance, but some structural changes in the risk sharing activity of banks, which are being confirmed in 2023.
The number of unfunded protections underwritten by insurers on SRT transactions originated by banks also continued to increase in 2022.
Practices in transactions structuring differ between European and North American issuers, due to differences in a) maturity of the practice, b) securitization regulatory standards (notably STS regulations in Europe) and c) deepness of capital markets.
Perspectives in risk sharing growth are mostly dependent on three factors:
– The supply of loans by banks, particularly to support investments in the real economy and climate transition,
– The level and cost of capital required by banks to comply to prudential regulations, and
– The effectiveness and cost of regulatory capital released by these transactions.