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The regulatory treatment of these CRT/SRT schemes was uncertain until last year, when the Federal Reserve clarified its stance. The Fed is now aware of these schemes and requires banks to seek approval before using them. However, the appetite to do CRT/SRT has gone way up this year, as banks seek credit protection and the private investors are willing to provide it.
Potential Procyclical Headwinds
The concern is that if the CRT/SRT market dries up, as the private investors realize that the risks they perceive as low are not actually low, banks will no longer be able to offload credit risk. This could lead to banks rejecting even more loans, further exacerbating the deteriorating credit cycle.