Faced with the alarming persistence of a shortage of international correspondent banks specialized on African risks confirmation, which hinders the continent’s commercial development. This reality poses a hindrance to the growth of African markets, leaving some issuing African banks and their Importer clients uncertain. The repercussions of this situation, manifested by delayed or outright canceled transactions, represent a major challenge to the continent’s economy.
To address this challenge, specialized funds and guarantee institutions, such as ETC – Export Trading Cooperation, propose the Master Risk Participation Agreement (MRPA) to Correspondent Banks. This innovative initiative aims to overcome these obstacles by syndicating, reducing the default and concentration risks of specific transactions.
The MRPA is based on English law, offering correspondent banks the opportunity to pool their risks in Trade Finance operations. The MRPA is intended for confirming correspondent banks, allowing them to share and mitigate risks associated with commercial transactions.
For confirming banks based in Europe, for example, regularly involved in Trade Finance operations with African issuing banks, signing an MRPA with a guarantee institution can prove to be a wise choice. Here are some essential reasons:
By establishing this framework risk participation agreement with guarantee institutions, financial institutions effectively share the default risk while reducing the concentration of their partner issuing banks in the portfolio. This strategic approach also allows them to benefit from specific coverage lines tailored to the counterparties in their portfolio. This can strengthen their position in the market and enable them to seize numerous opportunities offered by the dynamism of African markets. In summary, ratifying an MRPA for a confirming bank involved in Trade Finance with African issuing banks represents an opportunity to optimize risk management by securing commercial transactions.
The MRPA offers significant advantages to an European confirming bank engaged in Trade Finance with African issuing banks, especially in the context of compliance with Basel III prudential standards. Firstly, the MRPA allows the confirming bank to better manage its Tier 1 capital by optimizing the allocation of financial resources. By reducing concentration risk through a balanced distribution of exposures, the European confirming bank can enhance compliance with Basel III’s strict risk management requirements. Furthermore, the MRPA promotes a proactive approach in managing concentration risk by limiting exposures associated with Trade Finance operations. This helps prevent potential vulnerabilities and strengthens the financial resilience of the confirming bank against market fluctuations. By aligning operational practices with Basel III standards, the MRPA provides a strategic solution for confirming banks to ensure regulatory compliance while maintaining a strong capital base. This thoughtful approach enhances confidence in Trade Finance operations, promotes financial stability, and strengthens the bank’s competitive position in the international market.
By allowing financial institutions to syndicate their risks in international trade, the MRPA opens unprecedented opportunities to penetrate African markets. This strategic expansion promotes geographical diversification of activities, offering financial institutions the chance to explore emerging markets and seize growth opportunities on a global scale. The MRPA serves as an integrated solution, not only providing adequate regulatory compliance but also offering a strategic path to extended and diversified growth. With its ability to reinvent risk management and offer substantial benefits to financial institutions, the MRPA emerges as an indispensable instrument for the development of African markets, propelling sector players into an era of more efficient risk management and strategic growth.
ETC – Export Trading Cooperation’s risk participation method takes the form of an unfunded participation by authenticated Swift interbank financial message . This approach is supported by the A3 investment grade rating assigned to ETC (Credit Quality Step CQS 2, classified as “low” according to the EU classification) published on the European Securities and Markets Authority (ESMA) registry, thanks to the evaluation conducted by an external credit assessment institution (ECAI), in accordance with Regulation (EC) No 1060/2009. This “Investment Grade” rating allows risk weighting for regulatory purposes.
In summary, the Master Risk Participation Agreement (MRPA) constitutes a risk-sharing agreement concluded between ETC and the correspondent bank, allowing the latter to effectively syndicate and weigh its risks in trade finance transactions with issuing banks operating in Africa.
