the financial system development and stability sub-committee ati insurance products as a recognised...
TRANSCRIPT
The Financial System Development and Stability Sub-Committee
ATI Insurance products as a recognised tool for risk mitigation
Jef Vincent, CUOAfrican Trade Insurance Agency
19, August 2013Nairobi, Kenya
Insuring Africa, Guaranteeing
Opportunity
Presentation Outline
1. Background
2. ATI’s Proposal
3. Rationale for ATI’s Proposal
4. Key Facts on ATI
5. Risk Management Attributes of ATI
6. Conclusion & Recommendation
Africa’s Export Credit Agency
Credit Risk Mitigation (CRM)
● CRM refers to the various measures and techniques that lenders employ to minimize losses that may arise from a counterparty’s default
● It has therefore become an important element of banking regulators’ role in ensuring the soundness of banking systems
● Credit risk guarantee by institutions such as ATI is a widely used CRM tool in the developed world, against which capital relief is afforded banks that use it to secure their credit risks
Africa’s Export Credit Agency
ATI’s Proposal
Request to Central Banks within COMESA to designate Risk Weightings and offer Capital Relief to banks and financial institutions for lending facilities backed by ATI’s comprehensive credit risk cover
Rationale for the Proposal
● The Basel Framework has recognized certain risk mitigation
tools against which lower risk weightings may be applied to give banks some capital relief
● These include guarantees by corporates, sovereigns, central banks and other official entities
Para 53 of the Basel Framework: Claims on sovereigns and their Central Banks:
Note that ATI is rated A/Stable by Standard & Poor’s
Credit Rating of Guarantor
AAA to AA-
A+ to A- BBB+ to BBB-
Bb+ to B- Below B- Unrated
Risk Weighing
0% 20% 50% 100% 150% 100%
Rationale (cont’d)
● The Basel framework also recognizes claims against certain Multilateral Development Financial Institutions as qualifying for Zero Risk Weighting
These are listed in footnote 20 under paragraph 59 of the Basel Framework
● These institutions are recognized for their strong financial standing as well as the strength of their shareholders
Rationale (cont’d)
The financial institutions recognized for zero-risk weighting are:
• African Development Bank – AfDB• Asian Development Bank – ADB• Caribbean Development Bank – CDB• Council of Europe Development Bank – CEDB• European Investment Bank - EIB• European Investment Fund –EIF• European Bank for Reconstruction and Development – EBRD• Inter-American Development Bank- IADB• International Bank for Reconstruction and Development - IBRD• International Finance Corporation – IFC• Islamic Development Bank – IDB• Nordic Investment Bank - NDB
Africa’s Export Credit Agency
● In May 2010, the Multilateral Investment Guarantee Agency “MIGA”, which offers similar products as ATI, sought and was granted ascent by the Basel Committee on Banking Supervision for its guarantees be acknowledged for Zero-Risk Weighting
● Accordingly, despite not being a development bank, MIGA is now included in the list of multilateral development banks as set out on footnote 20 of the Basel Framework
● It needs to be highlighted that while MIGA only offers political risk and sovereign default guarantees, ATI’s scope of cover is much more relevant to bank risks as it includes credit risk cover on corporate borrowers
Rationale (cont’d)
ATI’s Request (1)In recognition of:
a) The ownership and control over ATI by African states; and the oversight role of the World Bank on ATI;
b) ATI’s strong “A” rating by Standard & Poor’s; and
c) The comprehensive scope if its cover;
ATI requests COMESA Central Banks to accord 20% risk weighting, or any other weighting as they may individually or by consensus consider appropriate, for bank facilities covered by ATI
ATI’s Request (2)
Additionally:
1. ATI requests COMESA Central Banks to allow banks to increase their single obligor limit proportionally to the amount of the exposure that is covered by ATI.
2. ATI requests to be allowed to access and to actively participate in the national credit bureaus.
Africa’s Export Credit Agency
Brief Introduction to ATI ATI’s Mandate:ATI was set up to promote trade and investment in
Africa and reduce the cost of doing business by offering risk mitigation products.
ATI Products:ATI offers investors and lenders comprehensive
insurance policies that protect them from:1. Political Risks such as expropriation,
nationalization, currency transfer restriction, embargo, war and political violence
2. Credit Risk against the non-payment of sovereign and sub-sovereign debt obligations
3. Credit risk against the non-payment of commercial debt by corporate obligors as well as calling of bonds
Africa’s Export Credit Agency
Brief Introduction to ATI Inception:ATI began operations in 2001
Corporate Identity:ATI is an African multilateral financial institution,
established under Article 102 of the Treaty of the United Nations, Certificate of Registration No. 39012 and with its headquarters in Nairobi, Kenya
Ownership:Initially owned 100% by African governments, ATI’s
shareholding has evolved to accommodate strong financial institutions sharing similar mandate. The Agency nonetheless remains majority-owned by African governments who subscribe to ATI’s capital and ratify its Treaty
ATI ShareholdersMember States
● Benin● Burundi● DR Congo● Kenya● Madagascar● Malawi● Rwanda● Tanzania● Uganda● Zambia
*Pending capital subscription
In Advanced Stages● African Development Bank● Ghana
Non-Member States● Africa Re● Atradius● COMESA● PTA bank● SACE● ZEP-RE● AfDB *
Sh
areh
old
ing
S
tru
ctu
reClass A Shareholders Paid In Share Capital
Millions of US$ % Republic of Benin 15,300,000 10%Republic of Burundi 7,200,000 5%Democratic Republic of Congo 19,200,000 13%Republic of Kenya 28,300,000 19%Republic of Madagascar 100,000 0%Republic of Malawi 17,200,000 11%Republic of Rwanda 8,700,000 6%United Republic of Tanzania 16,900,000 11%Republic of Uganda 22,900,000 15%Republic of Zambia 16,900,000 11%Total Class A 152,700,000 93%Other ShareholdersAFRICA RE 100,000 0%ATRADIUS 100,000 0%COMESA 100,000 0%PTA BANK 100,000 0%PTA RE 100,000 0%SACE 10,000,000 6%
ATI's Equity Capital - July 2013
The ATI Advantage1. Financials: - Very Strong Capitalization - Strong Investments - Strong Liquidity - Small size risk exposure retention and;
- Strong World Bank Support
2. Risk Management, through well defined exposure limitsi)Country Risk: Aggregate Exposure retained in every member state is restricted to 5 times compared to up to 12.5 times for banks (using an average capital adequacy ratio of 8%)
ii)Product Category Limits: ATI seeks to balance the utilisation of its Gross Exposure across product lines in its portfolio as in the table below
Products Limit as % of ATI’s Net Exposure
Political Risk Insurance In aggregate≤ 100%
Sovereign, Sub-Sovereign and Parastatal Obligor Non-payment Insurance
In aggregate≤ 40%
Private Obligor Non-payment In aggregate≤ 30%
Industrial Sectors Limit as a % of ATI’s Gross Exposure
Agribusiness In Aggregate ≤ 40%
Construction & Real Estate In Aggregate ≤ 20%
Financial Services In Aggregate ≤ 40%
Manufacturing In Aggregate ≤ 40%
Mining, Oil & Gas In Aggregate ≤ 30%
Power In Aggregate ≤ 30%
Telecommunications In Aggregate ≤ 30%
Transportation In Aggregate ≤ 30%
Services In Aggregate ≤ 40%
iii) Sector LimitsATI limits its Gross Exposures by industrial sector as another mechanism to achieve a diversified portfolio, as below.
The ATI Advantage (cont’d)
iv) Project Limits:ATI limits its Net Exposure, calculated as a percentage of capital and reserves, to a single project, across product lines as in the table below
The ATI Advantage (cont’d)
Products Limit as a % of ATI’s Capital & Reserves (US$ equivalent)
Political Risk Insurance 7.5% or US$ 10 million, whichever is higher
Sovereign Non-payment Insurance 7.5% or US$ 15million, whichever is higher
Single Obligor Credit Risk US$ 5 million
Africa’s Export Credit Agency
The ATI Advantage (cont’d)
v) Obligor LimitsFor credit risk, Net Exposure to a single obligor would not exceed US$ 5 million ( currently 3.2% of ATI’s capital)
For transactions that would result in exposures in excess of set limits, ATI cedes part of the exposure through risk sharing to international public and private reinsurers
Cognisant of reinsurers’ credit risk (reinsurer’s ability & capacity to pay claims), ATI follows a stringent criteria by requiring eligible reinsurers to have a rating of ‘A’ or better by S & P or equivalent rating by other major rating agencies, i.e. Moody’s, A.M. Best or Fitch
vi)Policy Wording ATI’s Policy Wordings are drawn to match international best practice and are Basle II Compliant for use by banks and financial institutions
Africa’s Export Credit Agency
Addressing some Critical Issues
1) Risk Management Capabilities:● ATI’s policies governing risk exposure limits, were set
at inception and have been revised only with the express authority of the ATI Board and the World Bank
● The Board of ATI comprises top government officials representing the member states that own the Agency
● ATI is also subject to periodic reviews by the World Bank
2) ATI’s Credit Rating is reviewed annually by Standard & Poor’s and a detailed ratings commentary is published. Banks relying on ATI collateral are therefore regularly updated on the status of ATI’s rating
● Banks generally conduct their own due diligence on ATI, as well as continuous monitoring such as annual reviews.
● ATI can provide the same to Banking Regulators so they are updated on the status of ATI at any given time.
3) Timing, Conditions & Exclusions for Claim Payments
● The ATI Policy Wording provides for less cumbersome claims payment provisions and exclusions which mostly define transactions eligible for ATI support
4) Possible Laxity in Borrower Monitoring on the Part of Banks transferring Risks (“Risk Shedders”)
● ATI’s approach is to ensure that banks retains a reasonable portion of risk (between 50% and 85%) as incentive for careful ongoing borrower monitoring
Africa’s Export Credit Agency
Critical Issues (cont’d)
● ATI as a creature of African governments provides a unique pool of financial resources and strength capable of facilitating international capital flows into member states, and expanding trade by mitigating against credit risks
● Having committed capital to ATI, African governments should maximize the benefits of ATI by encouraging banks to take up ATI’s insurance and thereby:
- Help expand lending;
- Mitigate banking losses from borrowers default by laying off the risk with ATI;
Africa’s Export Credit Agency
Conclusion & Recommendation
● In most instances ATI’s insurance is taken by banks to supplement, not substitute other collateral provided by borrowers
● By contributing to ATI’s underwriting capital, African governments, and the banks that insure with ATI, collectively commit more than necessary capital to secure lending transactions in the continent
● Accordingly, reasonable capital relief should be accorded to banks utilizing ATI’s risk mitigation products
● It is therefore proposed that COMESA Central Banks accord 20% risk weighting to bank facilities secured by ATI’s credit insurance cover
Africa’s Export Credit Agency
Conclusion & Recommendation
ATI HeadquartersKenya-Re Towers | Upperhill, Nairobi
ATI Rwanda OfficeGround Floor, Prester House
Boulevard de l’Umuganda | Kacyiru, [email protected]
ATI Tanzania Office1st Floor, Private Sector Hs | Mwaya Road
Dar es [email protected]
ATI Uganda OfficeWorkers House, 9th Floor
Southern Wing Plot 1 Pilkington Road | Kampala [email protected]
ATI Zambia OfficeKwacha House Annex | Cairo Road
ATI ContactsAfrica’s Export Credit Agency
www.ati-aca.org
Questions?
$3.1
m
$1.9
m
$1.3
$749
$349