Basel panel urges closer supervisor-regulator coordination as bank risk transfers grow

Basel Committee advisers say the growing use of investor-funded, structured risk-transfer (SRT) arrangements is creating channels that can reintroduce underwriting losses into banks despite apparent offloading of assets. They warn investors are increasingly layering bank-originated loans into funded structures that reduce visible equity cushions, altering the economic allocation of credit risk in ways current prudential metrics may not capture.

Regulators highlight persistent data gaps: inconsistent reporting formats, scarce transaction-level disclosure and limited visibility on ultimate loss absorbers. Those gaps hinder supervisors’ ability to size concentrations of exposure, run credible stress scenarios and set targeted capital or liquidity buffers across jurisdictions.

The Committee frames the challenge as one of funding and risk allocation rather than a single product, using the term risk transfers to encompass both contractual and de facto transfers of economic exposure. It signals concern that headline capital ratios can overstate resilience if offloaded risks remain economically borne by banks in stressed scenarios.

The panel’s recommendations foreground harmonized transaction-level templates, bilateral data-sharing protocols between prudential and market regulators, and coordinated cross-border stress tests that explicitly incorporate investor-funded loan and securitization chains. It also urges supervisors to track the ultimate source of loss-absorbing capacity rather than relying solely on legal form.

The Committee’s analysis aligns with contemporaneous warnings from the Financial Stability Board about rising leverage, liquidity mismatches and concentrated exposures in fixed-income markets — risks that can amplify deleveraging and spillovers when liquidity thins. That parallel implies supervisors should pair SRT reporting reforms with improvements to margin frameworks and collateral practices for secured funding chains so risks are not hidden in short-term repo and financing links.

UK debates over the systemic role of electronic trading and non-bank market-makers add another dimension: concentrated liquidity provision and algorithmic strategies can transmit stress rapidly through venues, clearing houses and counterparties. The Committee therefore recommends stress testing that combines balance-sheet scenarios with market-side dynamics, including liquidity compression and fast deleveraging.

Policy options listed by the panel include clearer definitions of genuine risk transfer, mandated granular reporting of securitizations and funding chains, joint on-site inspections between prudential and securities regulators, and stress scenarios calibrated to market leverage and algorithmic behaviour. Implementing these steps will likely require legal changes, investment in data systems, and closer international supervisory cooperation.

Immediate implications for banks and market intermediaries include higher compliance and reporting costs and increased supervisory scrutiny; over time, the measures aim to reduce hidden leverage and tail-risk propagation. The Committee cautions that without prompt action, regulatory arbitrage and the growth of non-bank funding channels could leave supervisors blind to vulnerabilities that amplify downturns.

The report elevates SRT monitoring to a supervisory priority and signals possible future guidance or calibration to capital rules if transparency and data harmonization are not achieved. Market participants should expect more intrusive data demands, coordinated cross-border examinations, and a greater focus on the economic — not just legal — allocation of risk.