Synthetic SRTs: A Well-Established Capital Management Tool for European Banks

The commentary focuses on European Banks' use of synthetic securitizations, in the form of significant risk transfer (SRT) transactions.

-- Synthetic SRTs have become a permanent tool in the capital strategy of European Banks to improve their capital resilience, optimize risk, and enhance lending capacity.
-- Corporate loans represent the main underlying asset for synthetic SRT transactions of European banks.
-- In our view, excessive reliance on SRTs to boost a bank's capital ratios could raise concerns over the bank's ability to generate capital via retained earnings.

"The use of synthetic SRTs will remain a relevant tool in the capital strategy of European banks, as well as in light of the future implementation of the Basel III framework, and potential merger and acquisition transactions," said Nicola De Caro, Senior Vice President and Sector Lead, European Financial Institution Ratings at Morningstar DBRS.