JPMorgan is sounding out investors about a pair of large synthetic risk transfer (SRT) deals ahead of looming changes to capital rules, according to people with knowledge of the matter.

The biggest US bank is in early discussions with investors for two SRTs that could total about US$2 billion in bonds combined, said the people, who asked not to be identified as the details are private. The transactions – at least one of which will be tied to a portfolio of corporate debt – are expected to hit the market during the fourth quarter of this year, some of the people said.

Conversations are preliminary and details of the financing may change, they added. A spokesperson for the lender declined to comment.

JPMorgan carried out a number of similar transactions over the course of last year when the US market for SRTs opened up as regulators weighed pushing for banks to hold more capital against potential future losses. The lender sold similarly structured private credit risk transfer bonds to shift risk away from its mortgage portfolios back in 2019, mimicking the operations of government agencies Fannie Mae and Freddie Mac. 

In an SRT, banks typically issue notes linked to a pool of loans that also include a credit derivative. Investors tempted by yields that can exceed 10% have been snapping up the notes, helping to provide the issuer with protection against losses in the pool of loans. That effectively transfers the bank’s credit risk, enabling it to cut the amount of regulatory capital it has to hold against the assets. 

While European banks have been the biggest users of such transactions in previous years, the largest increase in SRT volumes is now likely to come from Wall Street banks ahead of the so-called Basel III Endgame rules. 

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The scale of their use will depend on how stringent US supervisors decide those requirements should be. Ahead of their introduction, Wells Fargo and other lenders are also considering tapping the market later this year. BLOOMBERG