CRT & SRT – Real Risk Transfer or Just Rearranging the Furniture?

Banks are forever trying to make risk disappear. Not in a suspicious, “where did the briefcase go?” sort of way, but in the perfectly legal, please-don’t-worry-Mr-Regulator sense. The trouble is that making risk vanish is a bit like trying to hide a Labrador behind a lampshade: the regulator can still see its tail.

This is where Credit Risk Transfer (CRT) and Significant Risk Transfer (SRT) come in. CRT is the bit where a bank says, “Here, you take some of the risk for me,” and pays someone to do exactly that. SRT is the part where the regulator inspects the handover and decides whether it’s genuine or just nicely packaged.

And it’s these ideas that have quietly become central to how modern banks manage their balance sheets. Banks want to free up capital so they can lend more. Regulators want to be sure the risk has genuinely moved, not quietly drifted back to the bank when things get bumpy.

This Insight explains:

• what CRT actually means
• how SRT tests really work
• and why banks care so much about proving the risk is no longer theirs

By the end, the difference between CRT and SRT becomes surprisingly intuitive – and you’ll see why regulators spend so much effort checking whether the disappearing act is real or simply smoke and mirrors.

What Are CRT and SRT?

Credit Risk Transfer (CRT) – The Handing-Over Bit

Credit Risk Transfer is, in essence, beautifully simple: a bank has a pile of loans and would very much like someone else to worry about the chance of them going wrong. To make that happen, the bank pays investors (or insurers, or anyone brave enough) to take on the risk of borrowers defaulting.

How that transfer happens can vary:

• Cash securitisation – the good old-fashioned route.
  The bank sells the loans to an SPV, the SPV issues notes, and investors take the credit risk. Clean and tidy.
• Synthetic securitisation – now the common choice.
  The loans stay with the bank, but the risk gets shifted through instruments such as credit default swaps, financial guarantees, or credit-linked notes. All achieve the same result without the faff of moving the actual assets around.
• Insurance and other clever structures – not technically securitisation, but the principle is identical: risk goes elsewhere, and the bank pays for the privilege.

If CRT had a catchphrase, it would be “Your risk, our relief”.

But CRT on its own doesn’t earn the bank any brownie points with the regulator. For that, we need its stricter, clipboard-wielding sibling.

Significant Risk Transfer (SRT) – The Regulator’s Stamp of Approval

SRT is where the regulator leans in, adjusts their glasses and asks, “Have you genuinely shifted the risk, or is it just wandering back home when no one’s looking?”

Under the EU and UK Capital Requirements Regulation (CRR), a bank only gets to reduce its risk-weighted assets (the measure used to set capital requirements) if it can show that a significant slice of the credit risk truly sits with investors. Not in theory. Not in spirit. Actually.

To satisfy SRT, a transaction must:

• Transfer a meaningful portion of the risk.
• Avoid quirky structural features that could drag the risk back to the bank.
• Avoid any hint of “implicit support” (no side-letters, nudges, winks or friendly bailouts).
• Convince the regulator that the whole set-up is genuine.

SRT is essentially the reality-check button: CRT moves the risk; SRT confirms it’s genuinely gone.

Why the Distinction Matters

Banks use CRT all the time to shift risk to investors. But SRT is the point where the regulator steps in and says, “Yes, this transfer looks real enough for you to hold less capital.”

When a deal passes the SRT test:

• The bank doesn’t have to put aside as much money to protect itself.

• Its balance sheet looks stronger.

• And it gains room to issue new loans.

When a deal fails the SRT test, the bank is in an awkward spot. It has paid investors to take the risk… but still has to keep money aside as though the risk never left in the first place.

It’s a costly way to go nowhere.

How Banks Use CRT and SRT

Now that we’ve sorted out what CRT and SRT are, the next question is how banks actually put them to work. In securitisations, the two concepts sit side by side:

• CRT does the heavy lifting of shifting the risk
• SRT answers the regulator’s question: “Has enough of it actually gone?”

Banks use these structures for several very practical reasons:

• Strengthening capital ratios – Shifting part of a loan portfolio’s risk means the bank doesn’t have to tie up as much capital in it. The ratios look healthier, and the CFO breathes a little easier.

• Smoothing out concentration risk – If a bank has ended up with too many eggs in one basket – mortgages, SMEs, or a particular industry – CRT helps spread the impact without freezing new lending.

• Hedging losses without upsetting clients – Selling loans outright can be messy and politically awkward. CRT lets banks keep the loans – and the relationships – while passing on part of the risk.

• Raising funding (in cash deals) – Cash securitisations come with a bonus: the notes sold to investors bring in new funding. A two-for-one if the bank also wants liquidity.

• Freeing up balance sheet space – Capital tied up in old lending can be recycled into new lending. CRT/SRT is often used simply to keep the machine moving.

These transactions have become so common in Europe that most major banks now run SRT programmes as routinely as they refresh their mortgage rates. Not flashy, not exotic – just normal banking housekeeping.

How CRT and SRT Show Up Inside Securitisations

Cash and synthetic securitisations both carry CRT and SRT, but the way the risk moves – and the way the regulator looks at it – differs slightly depending on the route taken.

Cash Transactions – When the Loans Actually Leave

In a cash deal, the loans move to an SPV and live there instead. Because the assets have genuinely left, the regulator often finds it easier to judge whether enough risk has gone with them.

The key here is how much risk the bank keeps. If it holds onto too much of the loss-absorbing layers, the regulator simply won’t call it “significant”.

Synthetic Transactions – When the Loans Stay Exactly Where They Are

Synthetic deals are a bit more delicate. The loans stay with the bank, but the risk is transferred through protection contracts. Nothing physical moves, which means the regulator’s attention turns to the protection itself.

They want to know:

• Does the protection cover the losses that matter?

• Is it likely to pay out when needed?

• Is the structure doing anything subtle or unhelpful?

• And crucially, does the bank really stop carrying the risk?

If the answers are reassuring, synthetic deals can achieve SRT just as effectively as cash deals – only without relocating thousands of loans to an SPV.

Why Synthetic Deals Tend to Dominate

Over time, banks have gravitated to synthetic SRT for one simple reason: it’s efficient. Synthetic transactions:

• Keep borrower relationships untouched.

• Fit around the bank’s existing funding and servicing set-up.

• Avoid the admin of moving assets.

• And can be executed far more quickly.

In short, cash deals are elegant; synthetic deals are convenient. And convenience tends to win.

The Last Word

For something that sounds like admin, CRT and SRT carry a remarkable amount of weight. They decide how much risk a bank can pass on, how much capital it can free up and how confidently it can keep lending.

When the two line up properly, banks free capital, support new lending and keep portfolios tidy. When they don’t… well, someone is paying investors to take risk they’re still stuck with. And nobody enjoys that invoice.

Understanding how these two pieces fit together turns securitisations from a head-scratcher into something that finally clicks.