Soaring cost of bank capital will drive boom in SRT trades
The cost of regulatory capital associated with lending will keep rising after the recent scare over deposit flight and the coming credit downturn. The solution for banks is to reduce risk-weighted assets on their balance sheets by buying protection from credit funds eager to diversify away from leveraged loans.
The recent spate of deposit flight that spread panic through the banking systems of the US and Europe opens a chance for non-bank lenders to seize more of the core businesses that banks want to retain. Central bank emergency measures may have prevented the crisis from spreading, but a new phase of disintermediation has begun.
One area of the capital markets that should benefit from the recent scare around banks is significant risk transfer (SRT): a type of synthetic securitization in which non-bank investors sell risk protection to banks against specific loan portfolios.
Once called capital relief trades and sometimes credit risk sharing, this is still a small market but one that has been growing at a roughly 18% annual trend rate over the past decade. It could now grow much faster as issuing equity and additional tier-1s becomes more expensive for banks.