Groups Launch SRT Transaction to Support Trade Finance in Emerging Markets

By Adedapo Adesanya

The International Finance Corporation (IFC), a member of the World Bank Group, and BNP Paribas (BNPP), the European Union’s largest bank as measured by assets and a key player in international banking, have announced a landmark Synthetic Significant Risk Transfer (Synthetic SRT) transaction, which will enable BNPP to expand its trade finance activities and continue to support emerging markets.

The transaction is expected to be particularly impactful, as international trade finance flows have been adversely impacted by ongoing global economic uncertainty.

BNPP is a strategic user of SRTs across a variety of asset classes in developed economies, where the SRT product plays an important role in allowing the bank to meet the increased lending needs of its clients.

The deal, a $1 billion SRT on which IFC provided a $50 million risk guarantee, marks the first time BNPP is deploying this product to enable further lending operations in emerging markets. IFC is the sole investor in this transaction.

Synthetic SRTs are still relatively new in emerging markets. By effectively transferring credit risk to investors, this type of transaction allows banks to lower the risk weights on their asset exposures. Unlike a traditional securitization in which assets are sold to a special purpose entity issuing securities to investors, synthetic SRTs leave the assets on a bank’s balance sheet and third-party investors, such as IFC, assume some of their risk – freeing up regulatory capital and enabling the financial institution to undertake increased lending operations.

“We are delighted to partner with IFC on this landmark transaction to drive the development of trade finance in emerging markets,” said Ms Sandrine Ferdane, Global Head of Financial Institutions Coverage at BNP Paribas. “In today’s complex macroeconomic environment, SRT securitizations are an important tool that enables a bank [like ourselves] to manage risk and capital to expand lending activity and support emerging market economies.”

“This strategic transaction demonstrates how leading international banks can work with global investors to extend more credit to underserved markets, especially during a period of global volatility,” said Mr Tomasz Telma, Global Head of IFC’s Financial Institutions Group. “We look forward to supporting such innovative structures being deployed in emerging markets.”