US banks modest use of risk transfers is credit positive, Moody’s says

A very small proportion of U.S. banks have issued a complex product that enabled them to shed risk from loan portfolios and the relatively modest use of the products was a credit positive, Moody’s Ratings said in a report after surveying 69 rated U.S. banks.

In deals known as credit risk transfers, banks effectively buy insurance from hedge funds and other investors against the risk of losses from loans.

They grew in popularity in 2022 as regulators proposed increases to capital requirements for large banks after the regional banking crisis and under the Basel III regulations that pushed banks to look for ways to improve their regulatory capitalization levels.

Still only 15 out of 69 U.S. banks surveyed by Moody’s issued CRTs and their use was relatively modest, reflected in a median capital benefit of a 25 basis point increase in the Common Equity Tier 1 (CET1) ratio - which measures the quality of a bank’s assets, the report said.

“More material increase of more than 1% would likely indicate an overreliance on CRTs and therefore be credit negative,” it said.

The total outstanding CRT balances for these banks exceeded $15 billion, referencing more than $150 billion in assets, it said noting issuance volume correlated with the size of the bank, which was also a credit positive.

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Of the 26 surveyed banks with assets of $100 billion or more, 11 (42%) have issued CRTs and of the 43 rated banks with assets less than $100 billion, only four (9%) have issued CRTs, it said.

Banks completed only a few transactions, reflected in a median of three transactions and backed by high quality performing assets. The most active CRT issuers tend to be the global investment and universal banks, it said.

CRT investors were also quite concentrated, with the largest investor holding around 40% of a bank’s total CRT exposure and the top three investors holding around 80%. Most banks’ CRTs had no more than 10 investors, the survey found.

Most new CRT issuance in 2025 is likely to come from banks that have already engaged in such transactions and most of the survey respondents that had not already participated said they were unlikely to do so, said Moody’s.