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Synthetic securitization surges for trade finance

Despite concerns over recent regulatory changes, synthetic risk transfers remain a key driver for business lending in markets where private investment is underdeveloped.

Photo: Reuters

Coronavirus has had a substantial impact on the availability of trade finance in emerging markets. It has increased risk on many types of credit exposure and forced banks to explore all options for allocating capital towards businesses affected by the crisis.

Attendees at a seminar held by financial industry think tank Eurofi in April learned how the major trade finance banks were engaging in more synthetic risk transfer activity. In the same month, the International Finance Corporation (IFC) and Crédit Agricole CIB announced a synthetic risk transfer that saw IFC provide a $182 million guarantee on a $4 billion-equivalent reference portfolio composed mostly of trade finance assets in emerging markets.

This was the largest synthetic risk transfer undertaken by Crédit Agricole and the largest structured finance project ever implemented by IFC.

The European Investment Bank (EIB) invested approximately €3.7 billion last year in more than 20 synthetic deals where the originators committed to generate new small and medium-sized enterprise and mid-cap portfolios worth €10 billion.

Synthetic risk transfer enables banks to use every dollar of capital as efficiently as possible
Richard Hopkin, AFME

The European Investment Fund’s head of securitizations for southern Europe, Pablo Sanchez Gonzalez, describes synthetic securitizations as an equalizer because the structure can be used by any bank in any country.

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