Significant Risk Transfer Industry Argues ECB Is Fighting a Risk It Already Controls

The European significant risk transfer, or SRT, market is increasingly defined by a sharp divergence between the European Commission and the EU Parliament’s, or EP’s, desire for market growth on the one hand and the European Central Bank’s, or ECB’s, conservative supervisory stance on the other.

The market is currently navigating a pivotal legislative cycle, with the EP and the Council of the European Union targeting a trilogue agreement on a package of securitization reforms, including a number of proposals to facilitate SRTs, by midyear.

As of this month, the ECB has permanently streamlined its supervision through its SRT fast-track process, which slashes approval times for standardized SRT transactions from three months to just two weeks for deals meeting specific risk criteria. Qualifying portfolios must be high-quality and performing, with a total capital impact below 25 bps and a limit of 20% on leveraged loan exposure. Part of the proposed securitization reforms would implement a similar process for all EU supervisors.

Last November, however, the ECB warned that the SRT framework may be undermined by the inclusion of overly complex derivative exposures and the potential dominance of reinsurers should unfunded credit protection be allowed for simple, transparent and standardized, or STS, transactions as the co-legislators propose, which it said could introduce new financial stability risks and contagion between sectors.

In a recent report, trade association Paris Europlace noted that this stance is particularly puzzling because every SRT deal in Europe’s Single Supervisory Mechanism already undergoes an in-depth, transaction-by-transaction review by the ECB itself. This empowers supervisors to mitigate concentration or maturity risks at the source, making the push for more restrictive, “one-size-fits-all” legislation appear redundant.

Highlighting a growing supervisory divide, one SRT investor identified a potential structural shift in the EU toward the U.K. model, with dated calls either prohibited entirely or significantly extended. This would leave the 10% cleanup call as the primary exit mechanism for transactions. Because dated calls are a requirement for many funded investors, the industry warns that the ECB is creating a structural mismatch: If regulators refuse to allow these calls, the market will become even more dependent on a narrow slice of investors, further concentrating risk.

Furthermore, the ECB’s resistance to unfunded protection from insurers is increasingly viewed as being based on an outdated regulatory framework. While the ECB cites concerns over “rating cliffs,” its position is largely rooted in Article 249 of the Capital Requirements Regulation 2, or CRR2, legislation, which created a binary “cliff” where a single-notch downgrade of a protection provider could trigger a 100% loss of capital relief. CRR3, in force since Jan. 1, 2025, has fundamentally changed this “plumbing” to a more linear and proportional treatment.

Moreover, the Council and Parliament have proposed amendments to the unfunded protection rating requirement for STS to ensure market resilience. Whereas the Commission originally proposed a hard requirement of credit quality step 3, the December drafts propose that unfunded protection providers remain eligible even during some rating deterioration, albeit with tighter required safeguards, including a credit quality step 2 rating when the protection is first recognized.

Paris Europlace argues that by refusing to acknowledge these technical fixes, the ECB is ignoring that the “contagion risk” between insurance downgrades and banks’ creditworthiness is no longer present. And as Solvency II-regulated insurers are designed to withstand extreme volatility, they provide the very “strategic autonomy” the EU claims to seek.

The paradox is that current policies, which limit European insurer participation in both funded and unfunded formats, may be driving the very systemic risk the ECB hopes to avoid by creating a situation where European banks have become dependent on foreign capital to maintain their regulatory ratios. According to the ECB’s Securities Holdings Statistics by Sector, or SHSS, 75% of CLN exposure is held by non-EU investors. From a perspective of strategic autonomy, this is a significant vulnerability, and a sudden shift in U.S. or U.K. policy could leave a massive capital hole in the European banking system. This vulnerability is compounded by punitive liquidity coverage ratio, or LCR, haircuts on senior tranches of traditional securitizations, where the ECB accepts ABS at a 7% haircut for its own repo operations but legislation mandates a 25% to 35% haircut in bank treasurys’ liquid asset buffers, effectively stifling local liquidity.

The fear that insurers might monolithically dominate the market is also viewed by some as a dismissal of existing bank risk management capabilities. One risk and regulation specialist pointed out that banks already use sophisticated internal systems to manage and enforce strict counterparty limits. The inclusion of Solvency II-regulated insurers would arguably diversify the investor base away from the current heavy reliance on non-European hedge funds.