Moody's Talks - Focus on Finance Credit Risk Transfers a Net Positive for European and US banks, For Now
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Jul 9, 2025 
Warren Kornfeld, a Senior Vice President at Moody’s Ratings with expertise in banking, and Farooq Khan, a VP-Senior Analyst also at Moody's and based in London, dive into the intricacies of credit risk transfers. They discuss the balance banks strike by offloading credit risk, exposing both benefits and challenges. The conversation sheds light on counterparty risks, regulatory dynamics in the U.S. versus Europe, and the implications of semi-retail transactions. Transparency and investor concentration are key concerns as these transactions reshape capital management strategies.
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Understanding SRTs/CRTs Basics
- Significant risk transfers (SRTs) or credit risk transfers (CRTs) allow banks to shift a portion of credit risk to third parties.
- These are private, bilaterally structured, and mostly fully collateralized transactions protecting banks from specific loan losses.
SRTs Are Lower-Quality Capital
- SRTs provide banks with capital management options but are considered lower quality capital than common equity.
- Extensive use could create dependence issues and requires strong risk and operational management.
Why Banks and Investors Use CRTs
- Banks use SRTs/CRTs to reduce regulatory capital requirements, enabling more lending capacity.
- Protection sellers gain attractive returns from pools of high-quality loans referenced in transactions.