At a Glance
- The Significant Risk Transfer (“SRT”) market has evolved from a niche regulatory capital tool into a mainstream mechanism for bank capital optimization — reaching an unprecedented scale, but also mounting risks.
- As the market becomes increasingly crowded and priced to perfection, growth and innovation have created both opportunity and complexity— making transparency and disciplined underwriting more critical than ever.
- Regional banks are emerging participants in the U.S., using SRTs to manage balance-sheet pressure from commercial real estate and other concentrated exposures.
- At Ares, we focus on large, transparent transactions where we have asset-level expertise — recognizing that the market’s long-term stability will depend on preserving discipline and transparency, not growth for its own sake.
Why now?
The global banking industry is undergoing a structural shift from a traditional hold-to-maturity (storage) business model to an originate-to-distribute (moving) model. This transition is being driven by regulatory pressures that are pushing banks to focus on capital efficiency, active risk management, and balance sheet optimization.
To achieve these objectives, banks are using a range of tools — including but not limited to asset sales, last-out tranches1, non-core business divestitures, and joint ventures. One of the most important, yet least understood, of these tools is the Significant Risk Transfer, a structure that enables banks to transfer a portion of the credit risk on a portfolio of loans to investors.
By transferring the junior credit risk on these exposures, banks can reduce the capital required to support them and free up balance sheet capacity, enhancing flexibility to support future lending. SRTs can provide investors with exposure to diversified bank-quality credit portfolios and the potential for attractive risk-adjusted returns.
Regional and regulatory context
Europe formally incorporated SRTs into regulation in 2006 under the Basel II and Capital Requirements Regulation (CRR) frameworks, giving banks a clear and standardized path to use these transactions for capital relief.2 As a result, the European market developed early and matured quickly.
By contrast, the U.S. market remained limited for years because regulators had not explicitly defined how SRTs should be treated for capital purposes. In 2023, the Federal Reserve issued FAQs that provided some clarity to the capital treatment for certain SRT structures.3
This additional guidance has helped pave the way for broader adoption in the U.S., with both large and regional banks increasingly turning to SRTs for balance-sheet management and capital optimization.
An example
Regulations in the U.S.4 and Europe5 require banks to maintain minimum capital ratios to absorb losses and preserve stability in the financial system. SRTs can provide capital relief by allowing banks to materially lower risk-weighted assets (“RWA”)6 on their balance sheet. This is achieved by transferring a portion of the credit risk—typically a first-loss tranche7—to investors, while retaining the senior portion.
Lower RWA levels are important because banks must hold sufficient Common Equity Tier 1 (“CET1”)8 capital to support those risk-weighted assets. By transferring part of that credit risk to investors, a bank can reduce the capital it must hold in reserve. This may free up capacity for new lending and potentially enhance return on equity (“RoE”)9 through lower CET1 requirements.
For example, consider a bank with a $1 billion loan portfolio measured at a 100% risk weight and targeting a 13% CET1 ratio. By selling a 12.5% first-loss tranche to investors, the bank transfers $125 million of risk. The remaining $875 million senior portion carries a reduced risk weight of 20%10, or $175 million in RWA. As a result, the CET1 requirement falls from $130 million to $23 million—freeing $107 million in capital for other uses.
Market Landscape
The global SRT market has expanded rapidly over the past decade.11 Europe remains the largest and most mature region, while the U.S. market continues to gain momentum as regulatory clarity improves and broader participation drives growth. The U.S. now accounts for approximately 30% of global SRT activity, a meaningful shift in a short period.12
SRTs are being applied across a growing range of asset classes beyond traditional corporate and consumer portfolios, including fund finance, capital call facilities, digital infrastructure, BDC revolvers, and commercial real estate. Asset selection is typically guided by factors such as risk-weighted asset density, regulatory capital treatment, and portfolio concentration — all aimed at maximizing capital efficiency.
The investor base has also widened considerably. What began as a niche regulatory tool has evolved into a mainstream institutional market, with participation from specialist SRT funds, asset managers, insurers, pension funds, and hedge funds.13
Proceed with Caution
The rapid evolution of the SRT market demands both innovation and restraint. Growth, if detached from fundamentals, can undermine the very stability these structures are designed to support. For banks, SRTs offer a powerful tool for capital optimization; for investors, they present differentiated exposure to diversified credit risk.
As the market expands and structures become more complex, long-term success will depend on maintaining transparency, alignment, and disciplined execution. With competition driving tighter pricing and greater sophistication, selectivity and fundamentals will be the true differentiators.
In the end, not all SRTs are created equal.
Learn More
Our latest whitepaper, “The Significant Risk Transfer Market: Proceed with Caution,” takes a deeper look at the structures, asset classes, and market forces shaping the evolution of the SRT market. It explores how these transactions function, where opportunities and risks emerge, and what investors should consider as the market continues to expand.