How Banks Got Hooked on SRTs and Why Regulators Worry: QuickTake

Banks have been in a bind. They want to make more loans so they can better compete against non-banking lenders and boost profits, but they have been hindered by tighter rules imposed after the 2008 financial crisis that require them to hold aside extra money to cover potential losses on the loans they have already made. This leaves less fresh capital available to pursue new lending or expand the company.

Increasingly, the banks are turning to a financial instrument, the significant risk transfer, or SRT, that cuts the amount of risk on their books, freeing up money they had held ...