Banks offloading loan risk actually makes the financial system more fragile because it removes the bank's incentive to watch the borrower.
March 31, 2026
Original Paper
Synthetic, But How Much Risk Transfer?
SSRN · 6482739
The Takeaway
Most people assume that when a bank offloads risk to outside investors, the bank becomes safer. Instead, this research shows that once a bank no longer bears the loss of a potential default, they stop monitoring the quality of their loans, which creates hidden instabilities in the broader economy.
From the abstract
Banks use synthetic risk transfers (SRTs) to offload potential losses in their loan portfolios to non-bank investors while retaining the loans on their balance sheets. We investigate this trillion-euro market using transaction-level data from the euro area, the largest SRT market, and highlight three channels of potential risks to financial stability. First, we show that banks synthetically transfer loans that are capital-expensive relative to their riskiness. To establish causality, we exploit