On this episode of Bloomberg’s Odd Lots podcast, Guy Carpenter’s Michael Shemi, Managing Director, North America Structured Credit Leader, spoke about the growing market for credit risk transfer (CRT) transactions, also known as significant risk transfers (SRTs).
“Generally speaking, [CRTs are] the pooling of credit exposures by a financial institution, and transferring a subordinated portion of the risk to a third party,” Michael explained.
CRTs and SRTs have been happening globally for years, but they have, in some respects, been booming lately as banks develop capital management tools for their loan portfolios, especially in the US over the past year.
While these transactions may remind some of the 2008 financial crisis, Michael highlighted how the current SRT market is different.
“Much of the polemic around this harks back to 2008 and the financial crisis, and when people hear buzzwords like ‘synthetic’ and ‘derivatives,’ their stomachs start churning,” he said. “But this is different in every possible way. This is really about hedging actual credit risk that arises out of actual normal course of lending activities, not uncapped leveraged speculation that was the hallmark of many synthetic securitizations pre-2008. This is about true distribution of credit risk rather than concentration of credit risk at a number of highly leveraged counterparties.”
Listen to the full podcast to hear more about SRTs, why banks want them and what investors are getting in return.