Significant risk transfer: How banks can unlock more value

<h2><b><span class="h6">Banks need to treat SRT transactions not as one-off trades but as a repeatable program backed by data and governance.</span></b></h2>

<p>As banks reexamine how credit risk is managed and transferred, significant risk transfer (SRT) has emerged as a powerful mechanism for <a rel="noopener noreferrer" target="_blank" href="/content/cognizant-dot-com/us/en/insights/insights-blog/importance-of-data-to-significant-risk-transfer.html">optimizing capital while preserving lending capacity</a>.</p> <p>But too many banks still view SRT as a niche transaction rather than a foundational capability. Banks that benefit the most from SRTs will be those that shape the transactions into a discipline. This means understanding how to build regulatory credibility into an SRT, how much capital relief it can deliver and what it takes to execute SRTs repeatedly.</p> <p>By knowing the answers to three key questions about significant risk transfers, banks can position themselves for success.</p> <h3><span style="font-weight: normal;" class="h4">What makes a significant risk transfer transaction credible to regulators?</span></h3> <p>All roads to SRT begin with the EU Securitization Regulation (SECR). It establishes the requirements that govern transactions, including SRTs.</p> <p>As significant risk transfers gain traction among banks, one way to strengthen a transaction’s regulatory credibility is the SECR’s Simple, Transparent and Standardized (STS) label. This increasingly sought-after designation indicates that the securitization meets a higher set of standards.</p> <p>For banks pursuing significant risk transfers, earning the STS label provides a stronger foundation for capital relief, potentially reducing the amount of capital the bank needs to hold. Approximately one-quarter of EU SRT issuance <a rel="noopener noreferrer" target="_blank" href="https://www.esrb.europa.eu/pub/pdf/reports/esrb.report202505\_syntheticSTSsecuritisation.en.pdf">was STS-compliant</a> by the end of 2024, and the number is growing.</p> <p>But the STS designation is only one aspect of regulatory credibility. Achieving capital relief also requires banks to demonstrate to supervisors that the transaction transfers meaningful risk to third parties.</p> <p>Most banks already track the necessary information to prove risk transfer: loan-level data disclosures, standardized investor reporting and documented eligibility for the<b> </b>target loan portfolio. What most still lack is the ability to produce data in the granular, consistent form that SRTs demand. Building a strong regulatory foundation is key to SRT credibility.</p> <h3><span style="font-weight: normal;" class="h4">What determines how much capital relief a significant risk transfer can deliver?</span></h3> <p>Transferring credit risk is only part of the equation. For a significant risk transfer to deliver value, the transaction must also bring capital relief, freeing capital the bank can put to other uses.</p> <p>That’s where the Capital Requirements Regulation comes in. While SECR and STS help establish an SRT’s credibility, CRR determines whether the risk transfer qualifies for capital relief and how much.</p> <p>To reduce the capital held against underlying exposures, banks must demonstrate to regulators that sufficient credit risk has genuinely been transferred. Transfers must be substantive, not simply reflected in legal form.</p> <p>SRT transaction design and capital modeling are central to capital efficiency as they help banks determine how much risk to transfer and how to structure the transaction to maximize capital relief.&nbsp;&nbsp;</p> <h3><span style="font-weight: normal;" class="h4">What does it take to make significant risk transfer repeatable?</span></h3> <p>The BCBS 239 global standard and framework—first introduced as a regulatory response to the 2008 financial crisis—provides the data governance foundation that banks need to turn SRTs from a series of one-offs into a strategic program.</p> <p>For SRT programs, BCBS 239 has become a minimum entry requirement through its use of data, risk metrics and transparent lineage. As banks’ capabilities mature for the framework, they can extract more commercial benefit from their risk data and improved pricing transparency.</p> <p>However, BCBS 239 isn’t the finish line. Once a significant risk transfer is live, banks must manage the transaction’s ongoing performance. This oversight requires auditable, loan-level data to maintain a record of the reference pool.</p> <p>Spreadsheets and manual processes lack the operational discipline needed to support an ongoing program, particularly as banks move from individual transactions to repeatable SRT workflows. Rather than view BCBS 239 as a cost of compliance, high-performing banks will view it as the operational foundation for scalable risk transfer and sustainable revenue generation.</p> <h3><span style="font-weight: normal;" class="h4">How banks are strengthening their significant risk transfer foundations</span></h3> <p>The banks that generate the greatest value from SRT will be those that embed reliable data-driven governance and reporting into a repeatable operating process.&nbsp;&nbsp;</p> <p>We’re partnering with banks that are taking those steps now—and seeing big results. For example, one leading Canadian bank sought to strengthen its BCBS 239 compliance when regulators scrutinized its ability to consistently govern the critical data elements underpinning its risk reporting. Together, we built an enterprise data governance framework that established ownership of critical data, improved traceability from source to report, and increased governance across finance, risk and technology.</p> <p>Within 18 months, the bank reduced manual data reconciliations in its regulatory reporting cycle by more than 60% and could demonstrate clean data lineage for its most material risk exposures.</p> <p>A European bank made similar gains by automating its Basel III securitization capital calculations and reporting processes. Replacing the bank’s spreadsheet-driven workflows not only improved the accuracy of its capital calculations but also accelerated its regulatory reporting and boosted stakeholders’ confidence in the data and controls supporting securitization decisions.</p> <h3><span style="font-weight: normal;" class="h4">Next steps for significant risk transfer</span></h3> <p>Making the most of SRT lies in banks’ ability to execute these transactions repeatedly and with confidence. What’s more, the data and operating discipline that’s created in the process can become competitive differentiators.</p> <p>Banking leaders that build the required foundations will best position their organizations to realize SRTs’ value.</p> <p><i>Read more about how </i><a rel="noopener noreferrer" target="_blank" href="/content/cognizant-dot-com/us/en/insights/insights-blog/importance-of-data-to-significant-risk-transfer.html"><i>regulators are more closely examining banks’ data</i></a><i> as SRT use grows in popularity.</i></p> <p><i>The authors would like to thank Rajiv Mohapatra and Sathyanarayanan Palaniappan for their contributions to this blog.</i></p>