Introduction Banks can use significant risk transfer (SRT) securitization to transfer part of the credit risk in a loan portfolio to third-party investors while keeping the loans on their balance sheets. This can reduce risk-weighted assets and regulatory capital requirements, giving banks more capacity to lend or invest. For the Republic of Korea (ROK), the mechanism may offer a way to improve how domestic banks use capital and support productive financing. International experience also shows, however, that capital relief must reflect a genuine transfer of risk and that poorly designed transactions can create financial stability concerns. The ROK should therefore consider SRT as a capital management option, but adoption should follow a careful assessment of its likely capital effects and the safeguards needed to manage risk. Regulators would also need clearer rules, better market data, coordination across the financial industry, and investors capable of evaluating complex transactions. Analysis How significant risk transfer works In an SRT transaction, a bank transfers the credit risk associated with a portfolio of loans without transferring the underlying assets. The bank continues to hold the loans and can maintain its relationships with borrowers. Investors receive premiums for taking on part of the portfolio’s risk. The result for each party depends on unexpected losses in the underlying portfolio. A bank benefits more when unexpected losses are high because investors absorb the risk that has been transferred. Investors benefit when losses do not materialize or remain low. Banks and investors therefore negotiate the premium based on the estimated probability of unexpected losses and the portfolio’s risk profile. For banks, the main attraction is the potential reduction in risk-weighted assets (RWAs). Because regulatory capital requirements are tied to RWAs, lowering them can improve capital ratios and reduce the amount of capital a bank must hold against the portfolio. The released capacity can support additional lending and investment, including financing for innovative firms, startups, and small and medium-sized enterprises that may carry higher credit risk. This is a potential use of the released capacity, not an automatic outcome of an SRT transaction. Banks may also use capital relief for other purposes, including corporate value-up programs such as share repurchases. The policy question is therefore whether Korea can develop a framework that allows banks to use SRT efficiently while maintaining sound incentives and adequate protection against risk. A growing international market European banks have used SRT transactions to reduce RWAs since the 1990s. The market expanded more rapidly in Europe and North America during the 2020s. Global SRT issuance reached about $30 billion in 2024, 25% more than in the previous year, while the cumulative market size was estimated at about $1.1 trillion. Corporate loans make up the largest share of underlying assets in the global market. Loans to large firms account for 57%, while loans to SMEs account for 11%. Retail loans, including auto loans, represent a relatively larger share of the market in the United States. The number of banks participating in the SRT market is projected to rise from about 60 in 2022 to approximately 110 by 2030, implying average annual growth of 16%. In Europe, the European Banking Authority introduced an SRT framework in 2014 after Basel III increased capital requirements and bank capital costs. Participation by major European banks, including Barclays, BNP Paribas, Banco Santander, and Deutsche Bank, subsequently expanded. In the United States, SRT has also been used to manage capital ratios. Its use increased among regional banks that recorded substantial unrealized losses on long-term government bond holdings after interest rates rose following the pandemic. SRT enabled these banks to manage capital positions without selling those assets. Figure 1: Trends in Global SRT Issuance Source: Bloomberg; Chorus Capital Management. Figure 2. Projected Number of Banks Participating in the Global SRT Market Source: Pemberton Asset Management; Korea Center for International Finance Why SRT may offer capital relief Estimates based on the Basel III framework and ROK’s Detailed Regulations on Supervision of Banking Business suggest that domestic banks could achieve meaningful reductions in minimum regulatory capital requirements and related capital costs through SRT. The RWA profile of Korean banks indicates that transactions involving corporate loans with relatively high risk weights could generate substantial relief. Under ROK’s standardized approach, corporate exposures rated AAA to AA− carry a 20% risk weight. The weight rises to 50% for exposures rated A+ to A−, 100% for those rated BBB+ to BB and for unrated exposures, and 150% for exposures rated BB− or below. Transferring the risk associated with corporate loans rated BBB+ or below could therefore reduce RWAs and improve capital efficiency more substantially than transactions involving lower-risk exposures. SRT may also create an alternative investment opportunity for domestic institutional investors. Premiums in global SRT markets typically ranged from 8% to 12% a year in 2024. These potential returns come with specialized credit and structural risks, making the capacity of investors to evaluate the transactions a central part of any domestic framework. Financial stability risks require caution The growth of SRT does not eliminate questions about its effects on financial stability[1]. In 2020, the European Banking Authority identified concerns about whether risk transfer would remain effective over time, how transactions were structured, and whether the capital relief granted was proportionate to the risk actually transferred. In 2024, the International Monetary Fund grouped the risks into five broad areas: greater interconnectedness within the financial system, misleading capital signals, liquidity risk, transaction complexity, and regulatory arbitrage. These concerns are directly relevant to ROK because SRT can improve a bank’s reported capital position only if the transaction transfers risk in a durable and measurable way. Further research is needed on the implications of SRT for the Korean banking system. This should include the likely investor base, demand for the instruments, and the behavior of investors during severe stress over the credit cycle. These issues should be assessed before regulators determine the scale and design of a domestic market. Implications International experience points to three priorities if ROK decides to develop an SRT market. Establish clear regulatory and supervisory rules. Regulators should examine the European framework, assess which elements are applicable to ROK, and define how genuine risk transfer and appropriate capital relief will be evaluated. Build coordination and transparency. Policymakers, regulators, banks, and other market participants should share relevant experience and expertise, develop an industry-wide coordination mechanism, and build and share data on SRT transactions and their underlying assets. Develop an informed investor base. Professional investors need the expertise to assess the structure and risks of SRT. Given the specialized nature of these instruments, regulators should consider limiting participation to professional investors. SRT could help Korean banks use capital more efficiently and create additional capacity for productive financing. The international market demonstrates both the potential and the risks of the mechanism. The country needs to determine whether the capital benefits are meaningful under its banking rules and whether a domestic framework can ensure that capital relief remains proportionate to the credit risk transferred. [1] For a detailed discussion of the financial risks associated with SRT transactions, as identified in the European Banking Authority’s Report on Significant Risk Transfer in Securitisation under Article 244(6) of the Capital Requirements Regulation and the International Monetary Fund’s Significant Risk Transfers: Is There Really an Endgame in Sight?, see Yong-Sang Shyn’s An Analysis of the Effects of Significant Risk Transfer (SRT) Securitisations on Bank Capital Costs and Capital Adequacy. Resource Korea Institute of Finance website. Ask the Experts Yong-Sang Shyn Senior Research Fellow, Capital Markets Division, Korea Institute of Finance Yong-Sang Shyn has served as a senior research fellow in the Capital Markets Division at the Korea Institute of Finance since 2005. He earned a PhD in economics from Texas A&M University in the United States, where his dissertation examined topics related to knowledge-based growth in an open economy. His research focuses on capital markets, household and corporate finance, macroprudential policy and risk management, and real estate finance. Korea Institute of Finance (KIF) The Korea Institute of Finance provides expert analysis for the development of the Republic of Korea's financial sector and financial policy. Leave your question or comment in the section below: View the discussion thread.