"Excessive use" of SRTs shows bank weaknesses, Morningstar DBRS warns

Morningstar DBRS expects synthetic significant risk transfers (SRTs) to remain a capital planning tool for European banks this year, but has warned that “excessive use” could indicate weaknesses in their business models.

In its latest commentary, the research and ratings firm cited the “widespread” use of synthetic SRT transactions across Europe, with origination volumes remaining strong in 2025 and more first-time originators entering the market.

It reported that total loans under synthetic SRTs grew to €320bn (£277bn) in the first half of 2025, up by 37 per cent year on year, which accounted for an average of 5.1 per cent of total outstanding loans, up from 3.8 per cent in the first half of 2024.

The figures are based on aggregated data for a selected group of large European banks, with most of the banks increasing their exposure during this period.

“We expect transaction volumes to remain solid in 2026,” said Nicola De Caro, senior vice president and sector lead, European Financial Institution Ratings at Morningstar DBRS.

“The appeal of synthetic securitizations continues to increase, supported by higher shareholder remuneration, rising M&A activity, and evolving regulatory frameworks.

“Broader investor participation has also improved liquidity and made the pricing for these deals more attractive.”

However, the firm also warned that “excessive use of SRTs could be seen negatively, as it may indicate weaknesses in a bank’s business model and ability to generate capital organically through retained earnings”.

“High leverage and funding linkages between originators and investors could also pose risks to financial stability in times of stress,” the report said.

While the European synthetic market remains dominated by large banks, Morningstar observed that a growing number of smaller institutions are entering this market.

Figures showed that, as of June 2025, corporate and SME loans accounted for approximately 79 per cent of the loans under synthetic SRTs, although Morningstar DBRS said more recent transactions suggested an increased interest in other asset classes, such as project finance and commercial real estate.