Watchdogs Should Incorporate SRTs Into Stress Tests, BIS Says

The Bank for International Settlements published a paper recommending that supervisors include synthetic risk transfers (SRTs) in system-wide stress tests to better capture risks from these instruments. Adoption could alter measured capital and liquidity vulnerabilities tied to banks' credit and derivatives exposures and prompt updates to stress-testing frameworks and supervisory expectations.

Analysis

The Bank for International Settlements published a paper recommending that supervisors include synthetic risk transfers (SRTs) in system-wide stress tests to better capture risks from these instruments. Adoption could alter measured capital and liquidity vulnerabilities tied to banks' credit and derivatives exposures and prompt updates to stress-testing frameworks and supervisory expectations.