Ironically, on a day when Fed Chair Powell spent a large portion of his time discussing the new regulatory threats from Basel Endgame rules – that force banks to hold more capital, less risk – BlackRock has published a report that is forecasting rapid growth for transactions that allow banks to shed risk in their loan portfolios.
The freshly re-branded Synthetic Risk Transfer (SRT) deals, are simply credit-linked notes (which have been relatively uncommon since the great financial crisis) offering high (mid-double-digit) yields for borrowers willing to accept the implied credit default swap (that effectively transfers the credit risk tied to a pool of loans – such as CREs). Specifically, in SRT transactions, a bank earmarks a pool of assets on its balance sheet and buys credit default protection on the first 5% to 15% of the losses of that pool, so if losses materialize, the holders of the SRTs […]
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