Banks are selling a new type of bond that is allowing them to distribute risk among investors and more effectively cover potential losses from defaults.
The “risk-transfer securities” are “backed by short-term loans the bank makes to mortgage lenders,” the Wall Street Journal reports. In the case of borrower default, “the investors in the bonds effectively cover the loss.”
The bond is reportedly “a niche product,” the Journal reports, one that is “supported by a surging housing market and a recovery that has improved borrowers’ credit quality,” undercutting fears of risky lending practices and unstable securities that marked the 2008 financial crisis.
“People want exposure to housing and consumer markets that are performing,” JPMorgan analyst Kaustub Samant told the paper. “Risk transfer securities are one of the few places that give high returns in this environment.”
Larger banks have already been issuing such bonds for some time—as well as those tied to corporate and auto debt—but regional banks have lately been doing so as well, denoting what one analyst told the Journal was “a new phase in the market’s expansion.”