By Simon Miller
European banks are using structured credit insurance to remain active in Asian trade finance market and deleveraging their trade finance portfolios.
With the Eurozone debt crisis continuing and Basel III capital requirements being introduced, banks are facing increasing pressure on balance sheets and are looking to find ways of maintaining market share in emerging markets according to consultants Marsh.
Marsh’s report, Eurozone Crisis Threatens Asian Trade Finance Capacity, said European banks have a significantly reduced appetite for financing trade-related deals in emerging markets, but are using 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 between 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.”