Stress Test on SRTs Could Help Shed Light on Risks, BIS Says (1)

Financial watchdogs should consider including synthetic risk transfers in system-wide stress tests to better assess potential risks from the instruments, according to a paper published by the Bank for International Settlements.

Such exercises could help illuminate spillover effects between banks and other financial institutions such as insurers or private credit funds “under severe but plausible scenarios”, authors Michael Chui and Costas Stephanou at the BIS along with Prashant R. Babu from the Bank of England said.

Use of the instruments, which are intended to insure loans against default, remains limited but is growing, and was equivalent to around 2% ...