Insurers investing in one of the hottest trends in private credit — synthetic risk transfers (SRTs) — are set to face stricter oversight under new European Union proposals. The move is part of a broader effort to harmonise rules across member states and overhaul Europe’s securitisation market.
Denmark, currently holding the rotating presidency of the EU, has suggested additional checks and balances through the European Systemic Risk Board (ESRB). The concern is that insurers’ participation in SRTs, which involves taking on early losses to help banks reduce capital holdings, could pose systemic risks to financial stability. These transactions are integral to the wider securitisation market, which allows banks to mitigate risk.
Ahead of a meeting this week, the Danish presidency circulated a document proposing that the ESRB “monitor macroprudential risks associated with the provision of unfunded credit protection under the STS label.” STS — Simple, Transparent, and Standardised — benefits from lighter regulatory treatment.
The proposals also include a new ESRB mandate. Based at the European Central Bank in Frankfurt, the board would be required to publish a report 36 months after the planned securitisation legislation takes effect. The report should assess “the impact of STS on-balance-sheet securitisations on financial stability and any potential systemic risks, such as those arising from concentration and interconnectedness among non-public credit protection sellers.”
The compromise comes amid rising concerns about the securitisation market, which the EU has vowed to nurture as part of its growth strategy. Global banks’ synthetic securitisations have recently exceeded $670 billion, with European lenders including Banco Santander SA and Deutsche Bank AG among the largest users.
Executives in Copenhagen are seeking consensus among 27 governments to ensure securitisation rules — seen as crucial to financing housing, defence, and other projects — advance to the next stage of the EU’s lengthy legislative process.
The ECB has warned that easing conditions for insurers to invest in SRTs could “amplify counterparty risk by deepening existing channels and creating new pathways for contagion.” Francesco Mazzaferro, head of the ESRB Secretariat, highlighted in a speech on 13 October that “concentration risk would increase because the proposed amendment would grant (re)insurance companies a significant competitive advantage over other private investors.”