Lawmaker warns of perceived SRT risks

The risks of SRT trades “may not be fully understood” Senator Jack Reed, (D-RI) has warned US regulators. In a letter to the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), Reed, a senior member of the Senate Banking Committee, said “I am concerned that synthetic risk transfers may not be conducted in a safe and sound manner by the banks under your supervision and that they may increase risk across the financial system.”

The risks fall into two buckets, according to Reed. Firstly, SRT deals move risk into “opaque private markets where it may not be adequately managed and cannot be properly measure.”

Secondly, the growth of the market may encourage greater risk-taking by banks.

Given these dangers, Reed asks regulators to take “a very careful and judicious approach to synthetic risk transfers.”

“Without a full assessment of the risks associated with synthetic risk transfers, I am concerned that widespread efforts to avoid stronger capital requirements put in place as a response to the 2008 crisis could expose the financial system to new risks,” he added.