"Wall Street banks are expanding their use of complex risk transfer deals to offload exposure from prime brokerage divisions, freeing up cash to lend to hedge funds in pursuit of a bigger share of a booming market….
“You are betting on financial infrastructure not crumbling,”… pic.twitter.com/BFUAHuqypd
— kristen shaughnessy (@kshaughnessy2) July 29, 2025
Wall Street banks are slicing off chunks of prime brokerage exposure and shipping it into opaque risk transfer structures to clear balance sheet room. It is not about safety. It is about freeing up credit lines for more hedge fund bets. The mechanics resemble 2007 more than anyone cares to admit.
Structured risk transfer deals now quietly dominate parts of the off-balance-sheet world, and regulators are looking the other way. The Fed excluded these setups from the latest stress tests entirely.
“You’re betting on financial infrastructure not crumbling,” one SRT investor told the FT. That is not a figure of speech. These banks are loading up multi-manager funds with leverage, counting on automated margin calls to keep it from snapping. Nobody knows what holds this machine together, only that it moves fast until it doesn’t.
This is already the largest single point of exposure on major bank balance sheets. But because it’s sliced, layered, and moved off-book, it looks like nothing. Until it looks like everything.
When it breaks, the hole under the financial system won’t be gradual. It will be instant.
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