Economic Insights — Many U.S. banks use complex financial transactions to optimize capital and hedge possible credit losses, but not without risks.
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In 2023, the Federal Reserve’s Board of Governors issued a set of frequently asked questions (FAQ) about a seemingly esoteric financial instrument called a synthetic risk transfer (SRT). The FAQ spurred rapid growth in the U.S. market for SRTs, which allow banks to transfer some of the risk of their loans to outside investors. This article describes these financial instruments, explains how banks use them to reduce losses from credit defaults, provides an overview of the market’s size and growth, and highlights potential risks as the use of SRTs increases.
This article appeared in the Third Quarter 2025 issue of Economic Insights. Download and read the full issue.
