European Banks Using Structured Credit Insurance to Stay in Asia
European banks are increasingly using structured credit insurance as a way of simultaneously remaining active in the Asian trade finance market while deleveraging their trade finance portfolios, according to Marsh.
The insurance broking and risk advisory group’s report, ‘Eurozone Crisis Threatens Asia Trade Finance Capacity’, states that as the eurozone debt crisis combines with Basel III capital adequacy requirements to increase pressure on balance sheets, European banks are seeking ways to maintain market share in emerging markets. As they have a significantly reduced appetite for financing trade-related deals, however, more are turning to structured trade credit insurance to remain active in these markets.
Structured trade credit insurance covers the risk of non-payment from a buyer for goods and services or a borrower for trade related loans. It covers transactions with a credit risk exposure of one year to seven years, and many European jurisdictions allow banks to count it as tier one regulatory capital under Basel III rules that provide capital relief for banks.
“European banks face a choice in Asia: significantly reduce their trade finance business or use structured trade credit insurance to remain active in trade-related financing but with reduced levels of exposure,” said Richard Green, Asia leader for Marsh’s political risk and structured trade credit practice. “Emerging markets are heavily reliant on trade financing, especially at a time when imports are critical and exports can generate much-needed foreign exchange.”
Green added that in Asia Marsh placed around US$450m in insurance limits in the first half of 2012, a 425% increase over the figure of US$85m for the same period last year. “The majority of transactions have been large commodity-based transactions and shipments, such as the import or export of crude oil, liquefied natural gas, palm oil and coal,” he said.
Marsh also recently brokered a new US$532m trade credit policy, underwritten by nine leading insurers, for the International Finance Corporation (IFC), a member of the World Bank Group. This enabled the IFC to expand capacity under its Global Trade Finance Programme (GTFP), which guarantees emerging market trade transactions.