Synthetic Risk Transfer

Synthetic risk transfer (SRT) refers to transactions that allow banks to transfer some potential credit losses associated with loan portfolios to third-party investors and, therefore, to reduce regulatory capital allocated to the relevant loan portfolios. Typically, in an SRT transaction, IFC sells credit protection on a mezzanine (and, in some cases, junior) tranche of a pre-determined reference portfolio on the bank’s balance sheet. 

The structure is typically designed to comply with applicable regulations to achieve regulatory capital relief. SRT transactions are commonly used by European banks, but their popularity is growing in other markets as well. The released capital will be redirected to priority sectors. Therefore, SRT transactions can be an efficient tool to make available risk capital for IFC’s priority sectors.