The European Central Bank is investigating how banks use leverage in significant risk transfer deals, seeking details about lenders to SRT buyers, according to sources familiar with the matter. The ECB wants to identify who ultimately holds the risk in these transactions, which have grown fivefold since 2016 as banks seek better regulatory treatment by offloading loan risks.

Leverage allows SRT buyers to amplify yields by borrowing against asset portfolios, but the practice has raised red flags among regulators. Banks frequently shield SRT documents with non-disclosure agreements, limiting transparency about who provides leverage. The ECB's inquiry comes amid broader concerns about systemic risk in the financial system.

Regulators have warned about SRT circularity, where banks act as both borrowers and lenders, potentially creating dangerous feedback loops. The Bank for International Settlements recently highlighted how these instruments can amplify contagion risks between banks and other financial entities. The ECB's probe signals growing scrutiny of opaque financial engineering practices that may mask true risk exposures.