SRTs In The Resolution Of Failed Banks

I. Introduction

U.S. banks are increasingly turning to significant risk transfers (SRTs)¹ to manage credit risk and optimize regulatory capital. SRTs are transactions that satisfy the definition and operational criteria for "synthetic securitizations" under the bank regulatory capital rules.² In general terms, a synthetic securitization is a transaction in which a bank transfers credit risk on a pool of financial exposures to third parties through credit derivatives or guarantees, with the risk divided into tranches of different seniority.³ The capital rules impose operational requirements designed to ensure genuine risk transfer, including that the credit protection cannot be terminated or repriced due to credit deterioration.⁴