European-domiciled banks have historically looked to the securitisation market to optimise their balance sheets. In recent years, the regulatory environment has progressed to drive a wider scope of protection and market penetration. In today’s uncertain global markets, banks are seeking favourable approaches to satisfy capital allocation requirements, based on an assessment of risk retained on their books.
Significant risk transfer (SRT) is a transaction structure prevalent balance-sheet strategy that has been explicitly provided for under the European and UK regulatory framework. Financial markets are likely to see an expansion in SRT activity as Basel IV takes effect in 2023. According to the European Central Bank, SRT volume of securitisation of performing loans is expected to exceed the current record year of 2019, when volume reached €142bn, primarily in response to banks’ need to free up capital.
