Europe's banks risk transfer deals reach 6% of total loans by end-2024

LONDON, May 6 (Reuters) - Fourteen European banks had cut capital charges on around 6% of their loan books using significant risk transfers by the end of 2024, Moody's said on Tuesday, as the asset class gains popularity, especially in Europe.

The 6% is roughly equivalent to the 240 billion euros ($272.23 billion) of annual issuance in Europe's public securitisation market, the ratings agency said.

Significant risk transfers are privately-structured deals that enable banks to reduce regulatory capital requirements on loan portfolios by transferring associated credit risk to investors.

Regulators are broadly supportive of the tool to help lenders manage capital demands.

They are, however, increasing their scrutiny of the opaque market because of concerns about interconnectedness and correlation risk, particularly if banks also lend to the investors who provide them with protection against loss in a significant risk transfer.

According to the IMF, $1.1 trillion in assets have been securitised using the instruments globally since 2016, with Europe accounting for two thirds of the total.

Moody's said the 14 banks it studied have struck 181 significant risk transfer deals between them, referencing a pool of over 246 billion euros of loans.

The lenders have cut the risk weighted assets on those loans to just below 29 billion euros from around 117 billion euros.

"The SRT market's size and recent rapid growth, driven by strong investor demand and bank capital management, reflects the benefits SRT transactions yield for banks," Moody's said.

The capital unlocked can be used for other purposes including investment, mergers & acquisitions and stock buybacks.

The Association for Financial Markets in Europe said the reference pool for new European SRT transactions grew to 156 billion euros in 2024 from 77 billion euros in 2021, reflecting a compound annual growth rate of 26%.

The top 10 SRT investors hold about 75% of each bank's outstanding SRT exposure, and the top three about 50%, Moody's said, flagging the highly concentrated nature of the investor base.

It said it was hard "to establish whether the same investor is acting as a protection seller to several banks at the same time," given the market's opacity, but given the relatively small scale of SRTs, it concluded the risk was manageable.

($1 = 0.8815 euros))