A financial tool that has made waves in recent years could resurge with a different purpose. As scrutiny of lenders with high concentrations in commercial real estate loans continues, credit risk transfers could offer a way out for the banks. Banks have used the financial instruments for years to free up room on their balance sheets, and the transactions became more popular in the U.S. in 2023, when regulators seemed poised to increase capital requirements. Now, the potential burden of stricter capital rules seems to be in the rearview mirror, but the risks associated with large exposures to commercial real estate loans remain under the regulatory microscope. Credit risk transfers could be a strategy for banks to bring down their concentrations in those assets. Last month, Third Coast Bank in Texas struck a $200 million securitization secured by interests in a portfolio of loans to finance the construction of 11 residential planned communities across Houston, Dallas and Austin. EJF Capital, a global asset management firm, structured the transaction to transfer the risk from the bank’s balance sheet. Bart Caraway, president and CEO of Third Coast, called the $5 billion-asset company’s first securitization “a landmark achievement” in a prepared statement at the time. The transaction should “improve the diversity of the bank’s on-balance sheet loan portfolio.” “By converting a portion of our loan portfolio into marketable securities, we have not only reduced our concentration in commercial real estate, a key focus for regulators and source of potential risk, but also improved our risk-based capital ratios,” Caraway said last month. “The securitization allows us to redeploy capital more effectively into new lending opportunities.” While prior credit risk transfers were focused on solving for a bank’s total amount of capital, the novelty of the Third Coast deal was its goal of reducing the bank’s CRE ratio, said Matthew Bisanz, a bank lawyer at Mayer Brown, which represented EJF in the deal. Before Third Coast’s recent deal, its CRE exposure was around 350% of capital. The transaction brought that ratio down some 10 to 25 basis points, Chief Financial Officer John McWhorter said. Third Coast is also deep in construction and development lending — an area that regulators see as risky if concentrations exceed 100% of total capital. As of the first quarter, the Texas bank’s ratio was 146%. The deal with EJF helped reduce that metric to near 130%, Third Coast’s CFO said. The Texas bank may consider future securitizations, depending on investor demand, McWhorter added. But credit risk transfer deals, especially those focused on bringing down CRE exposures, are far from ubiquitous.