3 Reasons Banks’ Trade Finance Business all Chase the Same Deals

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Global Finance Magazine wrote an article the other day saying a greater supply of capital and a dip in demand are strangling the trade finance business and that trade pricing has been driven down quite significantly.

It went on to speak with various trade bankers from Citibank, HSBC and Standard Chartered all saying margins are eroding and one banker, Simon Constantinides, went so far as to believe some banks will exit the business by selling their trade finance operations. John Ahearn, Citi’s trade head, concurred saying, “The only way you survive this is to go for scale.”

The issue that the article failed to point out is the following:

First, there is a supply-demand imbalance in trade. The supply side has a narrow focus – mainly large investment grade companies because of re-regulation and Basel III. Banks attempt to give too much money to the same companies. This creates the margin problem.

Second, the global economy is not growing that fast but there are lots of need for trade credit – we can see that from the growth numbers from marketplace lenders to small business portfolios, and I am sure many emerging markets would say the same thing. The real question is to whom are you prepared to give credit? This is narrower because of re-regulation and the banks’ capital position which impacts their credit policies. The direct result of all the opportunities with non banks, small business lending, etc., is related to this question.

Third, because of QE, which in essence the U.S. government is printing $4 trillion in money to buy bonds, this money ultimately ends up in banks. If the fed engineers increasing rates and doesn’t remove deposits, banks will have a real problem and find that there are better yields for these deposits than 70-day trade finance assets. Until the government takes this cash out of the system, we have this pickle. And it’s a real pickle.

As the article suggest, we are in the throes of a major shake-up with trade finance.

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