The growing appeal of Significant Risk Transfer in private credit

While much of the focus in private credit has been on direct lending, Significant Risk Transfer (SRT) is emerging as a compelling alternative. What began as a regulatory tool is now gaining traction with a growing investor base, as banks look to optimise capital and issuance reaches record highs. With regulatory clarity improving and demand broadening, SRT is becoming an increasingly relevant part of the private credit landscape.

With its origins in Europe in the 1990s, SRT is a form of securitisation whereby banks transfer the credit risk of a specific portfolio of loans to investors who are compensated through a coupon. We consider them private investments, part of the growing universe of asset-backed finance.

In an SRT transaction, banks typically issue a mezzanine or first-loss credit-linked note (CLN) to investors, while the bank typically retains the senior note (and often the first-loss tranches). Through the CLN, the bank “significantly” reduces the credit risk it has on balance sheet and, following a rigorous discussion with its regulator, is permitted to reduce the risk-weighted assets (RWAs) calculation for the assets concerned. Put another way, this reduction directly improves the bank’s regulatory capital ratios, making SRT an alternative to other capital instruments as well as a strategic balance sheet management tool. As a result, banks use SRT not only to reduce RWAs, but also to efficiently free up capital to support new lending and business growth.

Drivers of change

The recent growth of the SRT market has been supported by regulatory developments. While SRT was introduced into the European regulatory framework as far back as 2006, issuance accelerated significantly after the European Banking Authority (EBA) provided clearer guidance around its use to banks in 2017, defining SRT criteria and increasing market transparency. The 2021 extension of the EU’s Simple, Transparent and Standardised (STS) securitisation framework to cover certain synthetic securitisations further reduced RWAs for retained tranches, making SRT even more attractive for issuers. Additionally, Basel III regulations incentivised banks to use SRT to free up capital rather than raising equity. Most recently, in February 2025, the European Central Bank (ECB) introduced a fast-track assessment for standardised SRT transactions, which is expected to drive further market growth.

Globally, SRT issuance reached a record of around $30bn in first-loss tranches in 2024, corresponding to nearly $300bn in underlying securitised loan assets (up from $150bn in 2021). Over half of that $30bn came from European and UK banks.

Issuance has been driven by large and globally systemically important European banks from France, Italy, Spain, and Germany, where the primary motivation has been capital efficiency rather than any concern around the performance of the underlying assets. Some banks use SRT as an ongoing capital optimisation tool, leading to regular and consistent issuance, while others use it on a more selective basis as a transitional solution that helps them respond to regulatory changes. Corporate and SME loans account for the majority of SRT transactions, as these loans typically carry higher capital requirements. However, more recently we have seen SRT issuance backed by more granular asset pools, such as consumer and auto loans.

In particular, we have seen significant growth in the US since 2023, following regulatory guidance from the Federal Reserve. Issuance has come from large banks looking to optimise their capital positions, while regional banks have used SRT to address specific pressures such as losses on their “available for sale” securities or commercial real estate exposure.

As more banks adapt their risk management and infrastructure, we expect continued issuance growth both from new entrants and existing issuers, as well as an expansion into additional asset classes such as residential mortgages, consumer loans, and specialised sectors like renewables and agriculture.

Growing investor base

SRT has attracted a diverse range of investors including asset managers, hedge funds, insurance companies and pension funds, and increasingly now private credit funds raising dedicated capital. SRT can give investors access to high quality, bank-originated assets, though thorough due diligence on the issuing banks’ lending practices, portfolio monitoring, and risk management standards remains essential.

SRT has also tended to offer compelling relative value versus other private debt products, historically delivering spreads in the region of 6-12% over cash. However, spreads in SRT tightened by 200-300bp across 2024 as growing investor demand added to a general risk-on sentiment across credit markets. One of the shortcomings of SRT market is low barriers to entry for investors, which carries risk for less sophisticated participants who are less able to perform the required due diligence. However, given the recent spread widening in public securitisation markets, we expect SRT relative value to improve again in 2025.

With continued regulatory support, an expanding issuer base and a growing investor base to match, the SRT market is an increasingly compelling route for accessing the credit risk of high quality bank assets in private asset-backed finance strategies.