I. Introduction -
U.S. banks are increasingly turning to significant risk transfers (SRTs) to manage credit risk and optimize regulatory capital. SRTs are transactions that satisfy the definition and operational criteria for “synthetic securitizations” under the bank regulatory capital rules. In general terms, a synthetic securitization is a transaction in which a bank transfers credit risk on a pool of financial exposures to third parties through credit derivatives or guarantees, with the risk divided into tranches of different seniority. The capital rules impose operational requirements designed to ensure genuine risk transfer, including that the credit protection cannot be terminated or repriced due to credit deterioration.
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