Banks turn to credit insurance in Asia
European banks are increasingly using structured credit insurance to finance Asian deals as a way of deleveraging their trade finance portfolios, according to a new report by Marsh.
The eurozone debt crisis and pressures from Basel III to increase capital requirements are forcing banks to look for innovative ways to maintain their market share in the emerging markets, particularly Asia. And as many European jurisdictions are allowing banks to count structured trade credit insurance as tier one regulatory capital under Basel III rules, it is proving to be a popular method, Marsh says.
Marsh has placed approximately US$450mn in insurance limits in Asia in the first half of 2012, compared with US$85mn for the same period last year – a rise of 425%.
“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,” says 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 adds.
The majority of transactions have been large commodity-based transactions and shipments, such as the import or export of crude oil, LNG, palm oil and coal, Marsh says.