Now worried about your secondary credit exposure? You should be.

By CubeLogic’s Karl Sees, Global Head of Product Strategy & Pre-Sales

March 21, 2023

Last week, I wrote about the risk management and regulatory failures at SVB. Since then, not only have 2 other regional US banks and the UK arm of SVB been rescued, but the Swiss National Bank and other global regulators have been forced to bail out Credit Suisse via an orchestrated takeover by UBS. Larry Fink, chairman of BlackRock, even warned about the threat of a “slow rolling” financial crisis triggered by the unwinding of easy money.

In the energy and commodities world, banks play a critical role in oiling the wheels of trading and supply chains through issuance of Letters of Credit (LCs). Firms in these sectors routinely take bank issued LCs to mitigate their credit exposure to buyers and trading counterparties. With few exceptions, these LCs are treated as “cash-equivalent” and afforded 100% offset to the primary credit exposure. In other words, effectively assuming no “secondary” exposure caused by the bank failing to meet its LC obligations. In a bank failure, LC beneficiaries are not protected like depositors and sit alongside bond holders and other unsecured creditors. Good luck with that…

In these febrile times, it is important to manage concentrations of secondary exposure via LCs, as well as bank guarantees and even credit insurance. Credit insurance is particularly problematic; who has not had a fight with their home or car insurance provider due to exclusions buried in the small print? Also, the withdrawal of credit insurance cover can be catastrophic as Greensill discovered (that wasn’t the only thing going on at Greensill but the withdrawal of their credit insurance was the final straw).

Is your existing credit risk management system able to measure, report and limit your secondary exposure? If not, come and talk to us at CubeLogic about our multi award-winning enterprise risk management platform, RiskCubed. Management of secondary credit exposure is an out-of-the-box feature we would be delighted to demonstrate to you.