Not so long ago, most banks viewed credit risk transfer as useful for little more than offloading noncore assets and managing concentration. But many institutions now see things differently, amid rising supervisory support, new regulation, and booming private market demand. As a result, transferring credit risk to third parties is an increasingly popular route to more efficient capital management and new revenue opportunities. Indeed, since 2016, the volume of synthetic asset securitization, the dominant approach to risk transfer, has risen to $1.1 trillion, with nearly two-thirds originating in Europe.1
Risk transfer is often associated with complex securitization structures at the center of the 2008 financial crisis. But in the past few years, the market has cleaned up its act, with the riskiest assets and high levels of leverage taken out of the equation. Furthermore, Basel IV capital rules provide a kicker for engagement. In particular, new guidance on the use of internal models to calculate capital requirements is motivating institutions to find alternative ways to reduce risk-weighted assets. Moreover, in a 2024 newsletter, the European Central Bank made clear its support, saying that if banks used more securitization, it would “help to invigorate and deepen Europe’s capital markets and ultimately benefit its economy.”2
Still, risk transfer is not without risks. The International Monetary Fund in its October 2024 Global financial stability report said that some features of synthetic structures may warrant close supervisory monitoring to ensure the necessary transparency. Those characteristics could also elevate interconnectedness and create negative feedback loops during periods of stress, it said. Furthermore, overreliance on synthetic risk transfer could expose banks to “business challenges” if market liquidity dried up.
Notwithstanding some element of caution, banks are applying risk transfer strategies to a growing range of balance sheet items. However, some are more suitable for transfer than others. In the auto loan business, for example, vehicles are not typically recognized as collateral under the EU Capital Requirements Regulation. Thus, there is an additional motivation to move the loan on. Market factors also play a role. Mortgage loans are good candidates for transfer because their predictable money flows appeal to investors. However, typically low internal ratings–based risk weights limited the economic convenience of a risk transfer: Basel IV’s output floor might bring them to the center of the stage.
The investor landscape is also shifting. In particular, private credit investors are playing a growing role, showing appetite to increase their credit exposure (Exhibit 1). Private investors have seen assets under management grow about 11 percent annually over recent years—leading to a flourishing of bank partnerships and providing further evidence that credit risk transfer is the real deal. Finally, bank approaches to structuring are evolving, with more flexible and practical synthetic structures overtaking traditional formats to become Europe’s go-to option.
How risk transfer can create benefits for banks and investors
Accelerating rates of risk transfer illustrate a powerful push–pull dynamic. Private debt funds need to employ their increased capital and dry powder, seeking to pull in credit exposures, while banks are stepping back from issuing credit and looking to push assets off the balance sheet (Exhibit 2).
But rising demand is not the only reason for higher deal volumes. In addition, banks are getting better at structuring deals to suit specific needs. In one recent example, a regional Italian bank, together with the arranger, took a smart approach to uncertain regulatory approval for its internal ratings based on Institutional Review Board (IRB) modeling. The bank launched a securitization under the (more restrictive) standardized approach but added an optional amortization mechanism for use if it later received IRB approval. Thus, whichever way regulators eventually went, the deal would remain efficient.
That same spirit of innovation is evident in the ways in which banks balance regulatory efficiency with portfolio performance. Whereas in the past, bulk portfolio sales were the norm, often with huge discounts, the dominant mindset is now more strategic, with banks looking to originate loans with distribution requirements included in underwriting to match bank and investor risk appetite. This enables them to generate higher fees without adding risk-weighted assets.
Risk transfer is also increasingly seen as a tool to appeal to different stakeholder interests. In December 2024, for example, the World Bank’s International Finance Corporation (IFC) partnered with Banco Santander Chile and Dutch pension fund investor PGGM on a deal that expanded mortgage lending to women in Chile, an underserved segment of the population. The bank sold a $1 billion portfolio of corporate loans, with IFC providing full credit risk protection on $800 million while PGGM gave IFC a first-loss guarantee. IFC retained the senior risk. The setup suited the purposes of all three parties: the bank could issue mortgages for an underserved segment of the population, PGGM diversified its investments, and the IFC fulfilled its role as capital provider to emerging markets.
The business has also catalyzed a wave of new relationships, with banks increasingly collaborating with private credit funds or setting up co-owned funds to share risks and rewards. Public examples include recent relationships between ING Bank and RiverRock European Capital Partners and between Société Générale and Brookfield, each structured slightly differently to suit the parties’ needs.
For banks, the financial upsides of effective balance sheet management can be significant. For example, in a synthetic securitization, in which the bank transfers risk but retains assets on balance sheet, banks can generate Common Equity Tier (CET1) capital at well below the cost of equity, or, from an alternative point of view, freeing up risk-weighted assets for reinvestment at well below the average return on risk-weighted assets. Moreover, the transactions accrue stress-testing benefits and provide protection against credit market downturns.
Finally, growth begets growth. With demand rising, spreads paid on the tranches held by investors have tightened over the recent period, which in turn has motivated higher levels of issuance. Of course, these may not persist indefinitely, and as supply and demand dynamics evolve, decision-makers will keep a close eye on the risk–reward equation.
The tool kit is increasingly dominated by synthetic deals
A few years ago, risk transfer was mainly focused on low-performing or legacy portfolios: for example, southern European home loans following the housing boom and correction before 2015. Now, increasingly, it is used for higher-quality portfolios and new origination. In addition, new analytical tools mean banks can accurately model, transfer, and report more granular portfolios, such as those comprising small- and medium-size enterprise or consumer loans.
The tool kit for transfer comprises a number of distinct approaches:
Traditional/cash securitizations. In cash securitizations, banks sell a portfolio of loans to a special purpose vehicle (SPV), which issues securities backed by those assets, often in tranches to reflect varying levels of risk and return. The same structure can be applied to new origination in an originate-to-distribute approach; banks originate portfolios which they hold to collect and sell (on an accounting basis) and then transfer them systematically to SPVs. By shifting ownership, banks can reduce risk-weighted assets and free up capital. While the approach means banks lose the income from the transferred assets, they typically retain origination fees and free up space for new origination.
Cash securitizations are sometimes preferred over synthetic securitizations, despite having additional operational complexities and higher setup costs. Rationales for cash securitizations include the fact that they provide banks with liquidity benefits, as notes issued by the SPV can be used as collateral for Eurosystem credit operations and can enlarge the pool of potential investors, provide leverage ratio benefits, and enable distribution of senior tranches. In addition, the future income earned by the loans can be used to improve the overall efficiency of the structure.
Synthetic securitizations. Synthetic securitizations allow banks to offload risk without transferring ownership. The approach has grown in popularity, with a 2023 survey showing synthetic deals were the most favored of all risk transfer tools (Exhibit 3).3 In synthetic transactions, investors provide protection against potential losses in exchange for a premium. This enables banks to get capital relief while retaining control of their assets, maintaining client relationships, and preserving income. The structures are valued for their flexibility, because they can be applied to a wider range of assets than cash securitizations and require less operational and contractual complexities. They can also be efficient from a cost/benefit point of view, irrespective of the market price of, or return on, the underlying portfolio.
Credit risk insurance. Credit risk insurance transfers the risk of specific loans or portfolios to an insurance company. The insurer agrees to cover potential credit losses in exchange for a regular premium. The method is straightforward, scalable, and effective for managing credit risk, primarily because it can improve regulatory capital efficiency without disrupting client relationships or business models.
Forward flow agreements. These allow banks to sell loans to investors as they are originated. This ensures a steady flow of capital relief and provides predictable income through origination fees. Forward flow agreements are particularly useful for scaling risk transfer activities and aligning origination strategies with investor appetite.
Hybrid structures. The market is evolving to include hybrid models that combine features of cash and synthetic securitizations or other instruments. These structures cater to specific needs, such as regulatory efficiency or improved risk–return trade-offs.
Next steps: Driving growth in the risk transfer business
Effectively implemented, risk transfer can be a powerful tool to grow the business, as well as serve client interests and meet the financing needs of the wider economy. But it works best where financial institutions move early to establish the foundations that will support scaling. Here we gather four elements that we have seen leading banks use to build momentum:
Assemble data resources. At the heart of successful risk transfer is access to reliable, actionable data. This is relatively easy to source for lower-volume commercial portfolios but more difficult for high-volume retail portfolios. Still, data is essential to assess the balance sheet in its entirety, help structure deals, provide transparency to investors, and inform portfolio management (for example, to monitor amortization, credit events, and replenishments), as well as for regulatory reporting.
With advances in data and simulation tools, banks can track how risk transfer impacts capital needs, liquidity, and overall performance for large numbers of portfolios spanning the full balance sheet. In addition, robust analytics allow banks to track performance at a granular level and provide additional evidence to investors. For example, we often see that the regulatory probability of default is higher than the observable default rate—a compelling factor for investors (Exhibit 4). Add robust stress-testing models and banks can confidently evaluate how well risk transfer solutions will perform, even under volatile market conditions. Automation can further simplify the process, making it easier to meet regulatory requirements such as significant risk transfer (SRT) standards.
Ensure robust governance. Data is just one piece of the puzzle. Banks also need clear risk transfer governance structures, which should include well-defined roles and responsibilities, the ability to align decisions with big-picture goals, and seamless coordination across teams. Centralized oversight—such as through a credit portfolio management unit—can help institutions manage their balance sheets and allocate resources where they are needed most. And by monitoring performance, teams across the organization can stay aligned and focused. Streamlining internal processes can get initiatives off the ground faster without sacrificing quality or integrity.
Build strong investor relationships. Strong investor relationships are critical to successful execution and for banks to understand investor preferences. Moreover, partnerships with institutions like sovereign-wealth funds and private credit firms open doors to scaling. Through regular communication, especially during periods of volatility, banks can build trust and ensure steady demand for their offerings.
Target excellent risk management. Setting clear policies on risk appetite and securing regulatory approvals are essential parts of the equation. And banks should be clear on the market and other risks of holding portfolios before distribution. Structuring products with distribution in mind—embedding an originate-to-distribute mindset—can make those portfolios more attractive for risk transfer transactions. Profitability management and capital allocation tools, as well as regulatory default models, can guide front-office decision-making. When these elements come together, banks can combine data insights with operational expertise to create a scaled business and well-oiled risk management machine.
Risk transfer has emerged from the capital markets shadows to become a powerful tool, and in some cases a strategic imperative, to optimize capital, improve returns, and enhance competitiveness. In a period marked by expanding private markets and tougher capital rules, demand and supply factors are in sync. If banks can adopt best practices and foster collaboration with investors, the door is open to creating a more competitive and flexible approach to doing business.
