U.S. Banks Utilize Credit Risk Transfers to Manage Loan Portfolio Risks
By Shankar Ramakrishnan
(Reuters) – A recent report by Moody’s Ratings revealed that only a small percentage of U.S. banks have leveraged credit risk transfers (CRTs) to mitigate risks associated with their loan portfolios. This limited adoption of CRTs was deemed a credit positive by Moody’s after conducting a survey of 69 rated U.S. banks.
CRTs involve banks purchasing insurance from hedge funds and other investors to protect against potential losses from loans. These products gained traction in 2022 as regulatory changes, such as increased capital requirements under Basel III regulations, prompted banks to explore innovative ways to bolster their regulatory capitalization levels.
Despite the potential benefits of CRTs, only 15 out of the 69 surveyed banks had issued such products, resulting in a modest increase in their Common Equity Tier 1 (CET1) ratio. Moody’s cautioned against an overreliance on CRTs, stating that a significant increase in capital benefits could be credit negative.
The total outstanding CRT balances for the surveyed banks exceeded $15 billion, representing over $150 billion in assets. The issuance volume of CRTs was found to correlate with the size of the bank, with larger banks more likely to engage in CRT transactions.
Among the surveyed banks, global investment and universal banks emerged as the most active CRT issuers, completing a median of three transactions backed by high-quality performing assets. Furthermore, CRT investors were concentrated, with the top three investors holding a significant portion of a bank’s total CRT exposure.
Looking ahead, Moody’s predicts that most new CRT issuance in 2025 will originate from banks with existing CRT transactions. However, many survey respondents indicated that they were unlikely to participate in CRTs in the future.
(Reporting by Shankar Ramakrishnan; Editing by Lincoln Feast.)
