‘Flood of Money’ Chases US Banks’ Hot New Trade Despite Risks

At his perch just across the river from the Federal Reserve, Neal Wilson likes to evangelize about the opportunity that the regulator is helping create for investment firms like his.

A campaign by US watchdogs to strengthen banks’ balance sheets is spurring lenders to explore creative ways to reduce risks on their books. Increasingly, they’re turning to significant risk transfers — a bit of Wall Street alchemy that shifts the first losses on loans for things like cars, commercial properties and corporate operations — to investors such as Wilson. If the loans perform well, he can reap a tidy profit.

In bank C-suites ...