Part 6/8:
The Rise of Credit Risk Transfer Schemes
As banks tighten lending standards and reject more loans, they are also taking proactive measures to ensure their balance sheets as credit quality deteriorates further. One of these measures is the use of credit risk transfer (CRT) or significant risk transfer (SRT) schemes, which are essentially a new spin on the old credit default swaps.
These CRT/SRT schemes allow banks to offload credit risk to private, non-bank investors, who are often the same institutional investors that were caught flat-footed on macro risks earlier this year. These investors are now happily providing credit protection, as they believe in a "soft landing" scenario and are willing to accept lower and lower payments for guaranteeing losses.