BBB to use SRTs to boost lending to SMEs
The British Business Bank (BBB) is planning to use significant risk transfers (SRTs) as a way to encourage commercial banks to increase lending to small- and medium-sized enterprises (SMEs).
In an interview with Bloomberg, Michael Strevens, head of structured guarantees at the BBB, said that he wants to help banks create SRTs which are linked to the riskiest parts of their loan portfolios.
This should effectively reduce the amount of regulatory capital that they have to set aside, which would allow them to ramp up their lending activity amid an ongoing SME funding gap.
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“Given especially that there’s a large influx of SRT investors coming in at the moment and yields coming in, we thought maybe this was a good time to show them something a bit different,” said Strevens.
He suggested that an initial deal could be for an SRT investment in the range of £10m to £20m, linked to a loan portfolio of between £400m and £500m. As part of the pilot test, the BBB could guarantee the mezzanine and senior parts of the loan portfolio, which would help the bank to meet its capital adequacy requirements.
When the project is further along, the BBB may opt to guarantee the mezzanine tranche only.
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“The combination of our exposures getting quite large in some instances, and the influx of new SRT investors driving yields down in more traditional issuances mean it seems a good time to start exploring this,” said Strevens.
He added that potential investors may be “asking for a premium” compared with a deal linked to a pool of large corporate loans, the most common type of SRT.
Earlier this year, Chorus Capital estimated the global issuance of SRTs in 2024 could reach a record $30bn (£23.38bn), as the strategy becomes more popular.
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