Canada's Big Five banks pile into hot risk-transfer trade
A little-watched corner of Canada’s credit market is being shaken up by the country’s largest lenders as they pile into securities that shift credit risks to other investors — a play likely to be copied by their counterparts on Wall Street.
Canada’s Big Five banks have quickly ramped up the use of synthetic risk-transfer tools, which allow them to partly pass the risk of loans going sour to private investors. The push comes as they face tougher regulatory requirements on capital buffers.
Exposure to synthetic securitizations has more than doubled over the last two years, swelling to $86.6 billion at the end of the last financial year, from $40.3 billion in 2022, according to data compiled by Bloomberg. In the last year alone, this has become a trade that Canada’s five largest lenders have joined in on, versus just a single player in the past, namely Bank of Montreal.
The surge in activity underscores how banks are tackling new rules that require them to hold more capital. Banks in the United States face billions of dollars more in capital measures under a set of rules known as Basel Endgame, while Canadian regulators have already enforced many of those changes and implemented two additional hikes to the largest banks’ capital requirements, beginning in late 2022.
“Synthetic securitization can become an essential part of bank activity,” said Robert Smalley, a financials credit desk analyst at UBS Group AG. “It certainly will be for U.S. banks as they look to incorporate the final Basel requirements.”
Representatives for BMO, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank confirmed their synthetic securitization exposures, while representatives for Bank of Nova Scotia and Royal Bank of Canada declined to
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