Using its Muskoka program, the Montreal-based bank finished a synthetic risk transfer secured by a $2.5 billion collection of large corporate loans, according to people familiar with the situation. In a separate move, it offloaded risk from a $2.5 billion pool of mid-market corporate loans via its Algonquin program; the sources requested anonymity since the transactions are not public.
This year, other Canadian lenders, including National Bank of Canada, Toronto-Dominion Bank, and Royal Bank of Canada, have either explored or completed similar transactions. A spokesperson for BMO declined to comment.
The sources said, "The two deals were finalized in the last eight weeks."
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These synthetic risk transfers are part of a broader trend in which banks use the instruments to manage capital efficiently. Investors are attracted by yields that can surpass 10%, and ongoing economic uncertainties keep demand robust. Crescent Capital, a firm active in this market, projects that global SRT issuance will hit a sixth consecutive annual record this year.
SRTs allow banks to free up regulatory capital by shifting credit risk to outside investors. Under Basel III capital rules, Canadian lenders must maintain certain capital ratios; SRTs help them meet those requirements without selling the loans outright. Institutional investors ranging from hedge funds to pension funds have flocked to the asset class, drawn by yields that have sometimes exceeded 10%. The steady demand has made SRTs a key tool for banks across Europe and Canada, where the market has expanded rapidly in recent years.
BMO's latest deals follow a pattern seen among Canadian banks seeking to optimize their balance sheets while keeping loan relationships intact. Banks transfer merely the credit risk, not the loans themselves, so they can preserve client ties and fee income while reducing the capital they need to hold.
The majority of SRT activity comes from European and Canadian lenders. Demand among investors for these instruments has stayed strong despite wider credit markets exhibiting pressure from factors including geopolitical strife, elevated energy costs, and concerns over how AI might affect industries like software and the debt-financed growth of data centers.
The trend among Canadian banks to use SRTs stems from strict regulatory capital requirements under Basel III. By transferring credit risk to investors, banks can improve their capital ratios without impacting lending relationships. This has become a popular strategy as lenders seek to optimize balance sheets while maintaining customer-facing operations.
The move underscores a growing reliance on synthetic risk transfers among Canadian banks to comply with Basel III capital requirements while preserving client relationships. With investors seeking higher yields amid market volatility, SRTs have become a favored instrument for both lenders and institutional buyers. This trend aligns with broader global issuance, which Crescent Capital expects to set a sixth consecutive annual record in 2026.
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