The World Bank’s International Finance Corporation (IFC) has agreed to guarantee part of a US$2bn portfolio of emerging market (EM) loans owned by French bank Crédit Agricole, reports the
. The paper says that it represents the latest example of banks using complex financing to help lower their regulatory capital costs.
IFC is providing US$90m worth of credit risk protection on a wide variety of EM loans, such as infrastructure lending in Egypt. It is the largest structured finance transaction ever created by IFC and officials hope that it will enable it to provide credit to developing countries in a more efficient way.
“We could have taken that US$90m and lent it to companies or we could go to a bank and support US$2bn worth of loans,” said an IFC official quoted by the
The paper adds that the deal is an example of a ‘synthetic securitisation’ or ‘reg-cap trade’, which involves banks purchasing credit risk protection – typically from a hedge fund or insurer – on part of a portfolio of loans. Using the structures frees up a bank’s regulatory capital, enabling it to increase its lending while the providers of the credit protection can earn a hefty return.
Such deals have been a persistent – albeit contentious – part of the financial system since the invention of credit default swaps (CDSs) in the late 1990s.
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