Significant Risk Trasfer
Research Report by Arc Ratings
ARC Rating released a research report on SIGNIFICANT RISK TRANSFER opportunities in 2024. The report underscores the significance of regulatory developments, market trends, and the strategic positioning of various financial institutions and investors in shaping the future of the SRT market.
The report begins by explaining the importance of securitization in financial institutions, specifically through SRTs, which help manage capital by transferring a significant portion of credit risk to investors. SRTs can be either traditional or synthetic, with synthetic transactions being more common due to their efficiency in capital relief.
The European SRT market has seen fluctuations, with significant growth between 2016 and 2019, a decline in 2020, and a recovery from 2021 onwards. The issuance volumes peaked in 2022 and maintained robust figures through 2023. The market tends to focus on capital management towards the end of the year.
The upcoming Basel 3.1 regulations (effective from 2025) are expected to significantly affect the SRT market. Although they do not increase the capital adequacy ratio, they modify risk weights and introduce an output floor, limiting the benefits from using internal risk models. This is likely to drive an increase in SRT issuances as banks adjust to these changes.
There are new structuring opportunities due to Basel 3.1, including adjustments in the size and composition of SRT tranches to optimize capital relief. Originators and banks will need to focus on effective pricing strategies to attract and maintain investor interest.
The evolving SRT landscape offers attractive opportunities for investors, particularly in mezzanine tranches which are expected to increase in volume. Investors can benefit from diversified risk and potential high yields compared to traditional assets.
While currently a small portion of the market, insurance companies are expected to play a growing role in the SRT market, benefiting from their robust capital and risk management practices.
The report highlights growth in SRT activities in the United States and emerging markets, driven by regulatory acceptance and the need for innovative financial products to manage risks and capital more effectively.
The report concludes that the SRT market is poised for growth, driven by regulatory changes and the continuing need for effective capital management solutions. Opportunities abound for banks, originators, and investors to capitalize on this evolving market.
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Relevant Links:
https://arcratings.com/researches/opportunities-in-significant-risk-transfer-in-2024/
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