U.S. banks have found a new way to unload risk as they scramble to adapt to tighter regulations and rising interest rates. These so-called synthetic risk transfers are expensive for banks but less costly than taking the full capital charges on the underlying assets. In most of these risk transfers, investors pay cash for credit-linked notes or credit derivatives issued by the banks. Banks started using synthetic risk transfers about 20 years ago, but they were rarely used in the U.S. after the 2008-09 financial crisis. Regulators in Europe and Canada set clear guidelines for the use of synthetic risk transfers after the crisis.

Source: Wall Street Journal November 08, 2023 13:05 UTC