Pimco Warns of Potential ‘Hidden’ Hazards of Bank Risk Transfers

Pacific Investment Management Co. is urging caution on the booming market for synthetic risk transfers, an increasingly popular tool used by banks to offload risk and boost their lending capacity.

In a note this week, Pimco portfolio managers led by Kris Kraus listed SRTs among areas of asset-based finance to approach with care “given significant capital formation or hidden risks that have yet to be tested.”

European banks, and more frequently US banks, use SRTs, also known as significant risk transfers, to shift underwriting risks to investors — freeing up capital to make new loans.

Hedge funds and other investors ...