In a dynamic financial landscape, risk management is at the forefront of concerns for the African banking systems and its stakeholders. Compliance with the prudential ratios of the Basel committee guidelines and transposition into local jurisdictions by Central banks sounds like a real challenge for most African banks.. This is particularly evident in the case of the Single Obligor Limit (SOL) ratio, which precisely defines a maximum ratio of 25% between Tier 1 capital and exposure to a client or a group of clients sharing the same reference shareholder.
In this context, financial institutions on the continent are constantly seeking solutions to:
The challenge for African banks and other financial institutions is to boost the financing of the economy, either by increasing their capital or by finding exposure weighting solutions to control risk of default (EAD: Exposure At Default).
Ready to meet this challenge alongside African banks, the guarantee institution ETC – Export Trading Cooperation offers its guarantee facility called Concentration Risk Bond (CRB). Let’s explore in this article how this innovative solution will address the concerns of African banks and other financial institutions.
ETC Export Trading Cooperation is an European guarantee institution that acts as a partner for businesses, banks, and institutions operating in African countries. ETC’s mission is to provide technical and financial services for international trade and investments.
The group’s headquarters are based in Treviso, Italy, with its Regional Office in Cotonou, Benin, and its Guarantee Fund in Douala, Cameroon, with subsidiaries and branches spanning Europe, Central Africa, and West Africa.
ETC Export Trading Cooperation holds a public rating of A3- (CQS – Credit quality step 2 “low credit risk” according to EU classification) published at the public register of European Securities and Markets Authority (ESMA) by an External Credit Assessment Institution (ECAI), in accordance with Regulation (EC) No 1060/2009. Additionally, ETC holds a Credit Rating in local currency long-term AA and short-term A1 made by pan african rating agency Bloomfield Investment Corporation.
ETC Export Trading Cooperation is an active member of SWIFT (Society for Worldwide Interbank Financial Telecommunication) under category 2, named NOSU (Non Supervised Entity active in the financial industry), with its Business Identifier Code (BIC) ETCGIT2T. This enables the institution to exchange authenticated interbank financial messages with banks and other financial institutions, for example, letters of credit, standby letters of credit, documentary collections, and others.
The Concentration Risk Bond (CRB) is a guarantee facility that enables financial institutions (FIs) and development finance institutions (DFIs) to properly manage concentration risk. Complying with Basel III standards, the CRB ensures compliance with the SOL ratio on large risks, within a limit set at 25% of regulatory capital Tier1.
The guarantee instrument provided by ETC – Export Trading Cooperation is the Standby Letter of Credit (SBLC) in accordance with the rules of International Chamber of Commerce (ICC) and materialized by Interbank financial swift message MT760.
The ETC Concentration Risk Bond, being a guarantee instrument mitigating Concentration and Default risks, is intended for Financial Institutions (FIs) or Development Financial Institutions (DFIs) lending in international transactions with the African markets. These entities can request this instrument when they want to: support key clients in their investments or trade transactions ; manage large risks without exceeding the SOLof 25% ; support their portfolio of SMEs to contribute the economic growth ; weight their portfolio assets to improve their Common Equity Tier1(CET1) ratio ; achieve maximum leverage on their capital by efficiently weighting their assets.
The Concentration Risk Bond (CRB) offered by ETC presents several advantages to assist banks in addressing their concerns regarding the control of exposures to the credit risk default (EAD: Exposure At Default).
ETC’s CRB allows the mitigation of values exposed to the risk of default to reduce the potential amount of losses in the event of non-payment by the borrower. Through the implementation of various risk management strategies, such as the use of collaterals, portfolio diversification, and the use of derivative financial instruments, banks have the option to use the CRB to limit potential losses in case of borrower default. This will contribute to strengthening the financial stability of the bank by minimizing the impact of defaults on its accounts.
The use of the public rating of a guarantee institution, evaluated by an External Credit Assessment Institution (ECAI), can influence how a bank weights its values exposed to credit risk (EAD) in the event of default. International rating agencies ECAIs assigns counterparties credit ratings , reflecting their financial strength and ability to honor their commitments. If a guarantee institution is investment grade rated, the bank can adjust the weighting of credit risk exposure in accordance with regulatory requirements. .
Given that ETC is rated A3- at the public register of European Securities and Markets Authority (ESMA) by an External Credit Assessment Institution (ECAI), therefore its rating can be used for regulatory purposes.Particularly ETC credit risk weighting is 50% for Euro zone and can go up till 80%in african currencies in accordance with market mapping scales. .
The Concentration Risk Bond (CRB) presents a unique opportunity to boost financing capabilities by mitigating and weighting exposures. This guarantee facility not only consolidates the prudential approach towards the Supervisory authority but also increases confidence in the bank using it, facilitating access to the necessary liquidity to support lending, investments, and trade activities.
Additionally, the CRB facilitates compliance with prudential ratios (SOL, CET1), ensuring the stability of the financial markets and avoiding potential sanctions. The solution offers flexible risk management tailored to the specific needs of financial institutions, whether to support SMEs, investment projects, or manage risks while respecting regulatory limits. This versatility is a major asset for institutions seeking customized solutions.
In summary, ETC’s Concentration Risk Bond goes beyond a simple guarantee by offering concrete and strategic benefits. It addresses the risk management, financing capacity strengthening, and regulatory compliance needs of financial institutions. By subscribing to this innovative solution, you position your institution for a solid and resilient financial future.
