New SCI Global Risk Transfer Report published

A couple more US regional bank capital relief trades are in the pipeline for late 2022 or early 2023, according to SCI’s new Global Risk Transfer Report. In terms of reference pools, a current area of focus is relatively high-quality assets that have a good credit story and are available in some depth.

“I can think of at least five regional banks that are looking quite carefully at the product, but very critically. There's a very significant investment that is required before you start putting together CRT transactions. You’ve got to have confidence that not only is there a case for the current portfolio, but also that you will come back to the market again,” says Gareth Old, partner at Clifford Chance in New York.

The first regional bank to enter the US CRT market was Texas Capital Bank in March 2021 with a mortgage warehouse deal. Western Alliance Bank has since executed three transactions, referencing mortgages and capital call facilities. More recently, in September, California-based Pacific Western Bank entered the market with a four-tranche CLN referencing residential mortgage assets (SCI 20 September).

“So far, there are three different asset classes, but discussions are going on around more or less anything the bank has on its books in large volumes - for instance, auto loan transactions or more consumer loans,” Old notes. “There has been discussion about doing synthetic credit card transactions. We’ve spent a lot of time figuring out how they would work, but it’s a stretch to figure out whether that's better for the bank than the cash transaction.”

Tim Armstrong, md at Guy Carpenter, agrees: “We have seen a sharp increase in inquiries from a variety of risk holders who are looking to CRT to diversify sources of capital and manage a variety of regulatory objectives across an increasing range of asset classes.”

The most recent Western Alliance deal was done on a principal protected basis, marking a first for the market. Old suggests that it will be interesting to see whether that feature is repeated and develops into being essentially a mandatory feature of any regional bank-issued CRT programme, or whether it's something done through a pricing uplift.

Looking ahead, he is optimistic about the prospects for the US private CRT market. “There are a lot of economic headwinds, but capital remains king and we are confident that CRT is going to be able to hold its own against competitors. Because it is very directly focused on maintaining the deep relationships between the banks and their customers and asset bases, while also developing the risk transfer capabilities shown in the European CRT markets for the last decade.”

Sponsored by Arch MI, ArrowMark Partners, Credit Benchmark and Guy Carpenter, SCI’s Global Risk Transfer Report traces the recent regulatory and structural evolution of the CRT market, examines the development of both the issuer base and the investor base, and looks at its prospects for the future. The report can be downloaded, for free, here.