How Banks Offload Risk From Their Balance Sheets
A deep dive into synthetic risk transfers.
Synthetic risk transfers, in which banks purchase insurance-like protection on some of their loans, is a growing market on Wall Street, with billions worth of deals made in the US last year. But of course, anything with the words "synthetic" and "risk transfer" is probably going to remind people of the 2008 financial crisis, when securitizations of loans blew up and infected the banking system. So what exactly are these new trades? Why do banks want to do them and what are investors getting in return for taking on this risk? In this episode, we speak with Michael Shemi, North America structured credit leader at Guy Carpenter, about what these deals are, how they're structured, and what they say about bank capital and the wider financial system.
Key Insights from the pod:
What does Guy Carpenter actually do? 6:21
How synthetic risk trades (SRTs) start and come to market 8:47
Nomenclature and how SRTs are actually capital management tools 10:35
Strategic uses for SRTs 12:27
Credit risk transfers (CRTs) globally vs. in the US 17:28
How assets are selected for these transactions 29:29
How the math generally shakes out 34:22
Market-structured differences between SRTs and credit default swaps 40:43