De-Risking Banks through Synthetic Securitization and Credit-Linked Note Issuance

Dr. W. Scott Frame, SFA’s Chief Economist & Head of Policy, explores how U.S. banks are increasingly using synthetic securitization to allocate regulatory capital more efficiently by transferring credit risk to outside investors through the issuance of credit-linked notes. Frame outlines the economic motivations for such transactions, summarizes the two existing transactions structures, and identifies instances where the federal government mandates similar risk transfer to reduce taxpayer exposure.