ECB Mandates Banks to Disclose Leverage Providers in SRT Transactions

Deep News03-20

According to informed sources, the European Central Bank is investigating the use of leverage within the significant risk transfer (SRT) market of the banking sector. The application of leverage is supporting the rapid growth of this market.

The sources indicated that the ECB is seeking information on banks that provide loans to buyers of SRTs. These individuals requested anonymity as the discussions are private.

Leverage is a form of borrowing based on asset portfolios, which allows SRT buyers to enhance their yields. SRT-related documents are typically protected by confidentiality agreements, with issuers approving access for leverage providers.

A spokesperson for the ECB declined to comment.

The ECB's request aims to identify who ultimately bears the risk of these instruments. Since 2016, banks' use of SRTs has expanded fivefold, as they transfer loan risks to achieve more favorable regulatory treatment.

Regulators have expressed concerns about "SRT circularity," where banks act as both borrowers and lenders, potentially increasing systemic leverage.

In a report this week, the Bank for International Settlements stated that SRTs could amplify risk contagion between banks and other financial institutions.

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