Credit Risk Transfers Gain Popularity Among Banks as Regulatory Relief Solution

The article discusses the increasing popularity of credit risk transfers (CRTs) among banks as a means of alleviating regulatory burdens, protecting against future losses, and navigating through a challenging period for the industry. These CRTs involve banks issuing credit-linked notes to outside investors in exchange for cash, essentially creating insurance policies against parts of their loan portfolios. Private equity firms, hedge funds, and asset management companies such as BlackRock, Blackstone, Apollo, Ares, and KKR are eager to participate in these deals due to the potential for favorable returns. While the use of CRTs is not new in Europe, they are gaining momentum in the United States as regulators prepare new capital requirement rules known as the “Basel 3 endgame.” Some large US banks, including Merchants Bank of Indiana, US Bancorp, and Huntington, have already completed CRT deals, with Wells Fargo also considering such a move. Regulators have approved these deals on a case-by-case basis, though some industry observers express caution due to the uncertainty surrounding these arrangements. David Hollerith, a senior reporter for Yahoo Finance, covers banking, crypto, and related topics.