(Bloomberg) -- The European Central Bank is seeking to accelerate its approval process for significant risk transfers, according to people familiar with the matter, helping lenders to take advantage of booming demand for the deals.
Under new proposals, banks will be allowed to submit information for their SRT transactions to the ECB just two weeks ahead of deal completion, said the people, who asked not to be identified because they’re not authorized to speak publicly about the matter. This compares with the current requirement for a minimum of three months, said the people.
In addition, the ECB aims to ask banks for fewer details about proposed transactions, the people said. A pilot of the simplified process is due to start in January and run for around six months, they added.
A representative for the ECB declined to comment.
SRTs are often configured as credit-linked notes that enable banks to free up capital they otherwise would have to use to insure their own loans. The ECB requires banks to submit information on their planned SRTs as part of the regulatory process to allow them to obtain such capital relief.
Institutional investors that take on the portfolio risk often do so for returns in excess of 10%. Still, a surge in the number of SRT transactions and the use of debt leverage to buy some of the notes have prompted the International Monetary Fund to flag concerns over potential financial stability risks.
Loans tied to SRTs have reached about $1 trillion this year, according to data compiled by Chorus Capital Management. Global issuance of SRTs reached about $16.6 billion in the first nine months of 2024, with European banks accounting for almost 70% of that, the London-based asset manager said in report in October.
Strong investor demand has allowed banks including Deutsche Bank AG, BNP Paribas SA and Spain’s Banco Bilbao Vizcaya Argentaria SA to bolster the size of their SRT deals from what was originally planned. Banco Santander SA, one of the world largest issuers of SRTs, has been selling at least a dozen of such deals in effort to bolster profitability ratios, Bloomberg reported Nov. 21.
While there’s been an increase in simple and standardized deals in Europe, there “are still some frictions with capital relief transactions” with supervisors, according to Francois-Louis Michaud, executive director of the European Banking Authority.
“It took time for supervisors to build up the expertise to look at these transactions,” he said in a Nov. 15 interview in Paris. “The fact that so many are tailor-made is part of the problem, it is a higher cost of supervision. Hence our push for standardized transactions.”
The ECB’s move to accelerate SRT approvals follows recommendations by a joint working group of ECB officials, representatives of around 12 banks and the European Banking Federation lobby, the people said.
A representative for the EBF declined to comment.
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