Key takeaways
- A synthetic securitisation transfers the credit risk of a loan portfolio to investors without selling the loans.
- Banks use it mainly to achieve significant risk transfer (SRT) and reduce the capital they hold against those loans.
- Since April 2021, EU synthetic deals that meet set criteria can be labelled STS and receive lower capital charges on the senior tranche the bank keeps.
- The ECB reports that synthetic securitisation has almost tripled in volume since 2021, while finding only a small effect on lending.
What is synthetic securitisation?
In a synthetic securitisation, a bank keeps a portfolio of loans on its balance sheet and buys credit protection on part of that portfolio from investors. If borrowers in the reference portfolio default, investors cover the agreed share of the losses. In return, the bank pays investors a premium.
The loans themselves never move. Borrowers keep dealing with the same bank, which is one reason banks use synthetics for corporate and SME loans where the client relationship matters.
The two main types of securitisation
| Traditional (true sale) | Synthetic | |
|---|---|---|
| What moves | The loans are sold to a special purpose vehicle | Only the credit risk moves |
| How investors are paid | From cash flows on the loans | From premiums paid by the bank |
| Funding for the bank | Yes, the bank receives sale proceeds | No, unless structured as funded notes |
| Main use | Funding and balance-sheet reduction | Capital relief and risk management |
How does significant risk transfer (SRT) work?
A bank can only reduce its risk-weighted assets through a synthetic securitisation if supervisors accept that significant credit risk has passed to third parties. The conditions are set out in Article 245 of the Capital Requirements Regulation.
A typical SRT deal splits the reference portfolio into tranches:
- First-loss or junior tranche. Often retained by the bank or sold.
- Mezzanine tranche. The tranche investors usually protect. Losses here are paid by the protection seller.
- Senior tranche. Kept by the bank, now carrying a lower capital charge because the risk below it has been transferred.
Protection is provided through a financial guarantee or a credit derivative.
STS synthetic securitisation
Regulation (EU) 2021/557 extended the “simple, transparent and standardised” (STS) label to on-balance-sheet synthetic securitisations. To qualify, a deal must meet the criteria in Articles 26b to 26e of the Securitisation Regulation:
- Simplicity (26b): eligibility criteria and originator requirements for the reference portfolio.
- Standardisation (26c): rules on interest rate and currency risk, reference rates and amortisation.
- Transparency (26d): among other things, at least five years of historical default and loss data made available to investors before pricing.
- Credit protection (26e): a minimum set of credit events, a third-party verification agent, and rules on synthetic excess spread.
Compliance gives originators preferential risk weights on the senior tranche they retain. Only the originator notifies the STS status of a synthetic deal.
Is synthetic securitisation the same as a synthetic CDO?
No. Pre-2008 synthetic CDOs were mostly arbitrage trades: investors took exposure to credit risk that the arranger did not own. Today’s European synthetic securitisations are balance-sheet transactions: the bank owns the loans, keeps them and transfers part of their risk, and the STS rules exist to keep these deals simple and transparent.
What the ECB says about the market
In a September 2026 blog post, ECB staff describe synthetics as the fastest-growing part of the European securitisation market, having almost tripled in volume since 2021. They estimate that a 1% increase in synthetics issuance raises corporate loan growth by only about 0.02%, and they flag rollover and counterparty risks if protection sellers do not renew cover. Their conclusion is that the economic benefits should not be overstated.
Frequently asked questions
What are synthetic securities? Instruments whose returns come from credit risk transferred through a guarantee or derivative rather than from owning the underlying assets, such as credit-linked notes in an SRT deal.
Why do banks use synthetic securitisation? Mainly to reduce risk-weighted assets and free up capital while keeping the loans and the client relationships.
Related: NPL securitisation and capital relief, securitisation concepts and examples.
Risk transfer and capital relief are on the agenda at Private Credit Days Europe, 18–19 November 2026, London. Request the agenda.
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