The hottest way for banks to remove risk from their balance sheets

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Synthetic risk transfers, in which banks buy insurance-like protection on some of their loans, are a growing market on Wall Street, with billions of dollars worth of transactions completed in the U.S. last year. But of course, anything associated with the words “synthetic” and “risk transfer” probably reminds people of the 2008 financial crisis, when loan securitization burst and infected the banking system. So what exactly are these new deals? Why do banks want to do them, and what do investors get for taking on the risk? In this episode, we talk to Michael Shemi, head of structured credit in North America at Guy Carpenter, about what these deals are, how they are structured, and what they say about bank capital and the financial system as a whole.