Bank of England flags rising risks as UK lenders turn to unfunded significant risk transfers

The Bank of England’s prudential arm is sounding the alarm on a growing trend among UK banks: the use of unfunded Significant Risk Transfers, a capital optimization tool that essentially lets lenders offload loan portfolio risk without putting up collateral. The Prudential Regulation Authority says these transactions carry meaningfully higher counterparty and rollover risks than their funded equivalents, and it’s preparing to do something about it.

What SRTs actually are and why unfunded ones are riskier

Significant Risk Transfers enable banks to offload junior credit risk from loan portfolios to third-party investors by means of credit derivatives such as credit default swaps. This allows banks to release regulatory capital while retaining the more secure senior credit exposure and control over the underlying assets.

Funded SRTs require the protection seller to post full collateral. That money sits there, ready to cover losses. Unfunded SRTs skip that step entirely. The bank relies on the creditworthiness of the protection seller, often an insurer or supranational entity, without any collateral backing the deal. If the protection provider defaults or can’t pay when called upon, the bank is left holding risk it thought it had transferred.

By the end of 2024, SRTs covered around 2% or less of total bank loans across the EU, UK, US, and Canada. That translates to roughly 1% of consolidated assets.

The PRA’s regulatory response

An updated version of Supervisory Statement SS9/13, focused on securitization SRTs, takes effect on January 1, 2026. The new rules will impose stricter capital treatment conditions and increase monitoring requirements for the creditworthiness of protection sellers.

The PRA is particularly focused on what it calls “economic substance,” ensuring these arrangements accurately reflect real risk transfers and liquidity rather than merely the structural arrangements in place.

This follows an April 2025 Dear CFO letter from the PRA that flagged specific concerns about the misclassification of illiquid SRTs, raising governance questions about how banks are claiming capital relief.

The top 10 SRT issuers in the EU and UK accounted for 64% of total outstanding amounts in recent data.

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