Is Bank funding insufficient to meet demand for Supply Chain Finance?

I have had this question asked to me a few times by bankers and others interested in knowing if supply chain finance arrangers/ funding sources, ie mostly banks, arranged more funding than the capital the bank can supply. This is especially relevant given banks around the world deleveraging and many looking to sell assets – see recent news on Unicredit as one of many examples. UniCredit to Raise $14 Billion, Shed Bad Loans and Cut Jobs in Overhaul

Any large Fortune 1000 has billions in payables to vendors at any one time. For example, Best Buy in theory has $5 or 10 billion in payables, and could have a $2bn program in notional outstandings.  In theory if Best Buy wants to move terms from 30 or 45 days to 90 or 120, in theory should be able to do it as an investment grade company at a significantly cheaper price, and it becomes a supply and demand issue.

There is this perpetual myth that there is some great liquidity void in this market as banks either underserved or exited due to capital requirements and pruning of their customer base. While banks have certainly deleveraged their balance sheet, there is appetite for good credit risk.

I have talked about how big the market is for supply chain finance – see How Big is the Supply Chain Finance Market? Bottom line, sizing is a directional guess at best.

What we do know is a few things:

  1. Total debt capital markets of US Bonds is $40tn, which includes asset backed securities, municipals, corporate debt, loans, treasury debt, etc. Those markets appear to be functioning, even in this dysfunctional, negative rate based world.  The corporate bond market is around 9 trillion.  Can the market absorb $500 billion or  trillion more in supply chain finance assets?  You bet.  But it depends on the right price, structure, technical understanding, regulation, and knowledge and access to investors drive capital markets.
  2. Banks do not need to keep assets on their balance sheet. We know banks are not growing their balance sheets.  It has been long argued by me that an originate to distribute model needs to be built for trade. While we have made some inroads in that space, the market for trade assets has remained mostly opaque and private, and many involved like it that way (transparency seems to reduce alpha). See my posts How Federated Investors invests in Trade Finance Assets and Where Can Institutional Investors Buy Trade Receivables?
  3. I know of insurance companies that are having growth rates of billions each year. That money needs to be deployed. The job of the Chief Investment Officer is to find returns relative to their liabilities. How do they find investments? When you have to invest tens of millions daily, where do you go in this environment?

There are several hundred Supply Chain finance programs globally. I am sure the market can continue to function if outstandings doubled or even tripled.  The challenge is there is not enough supply of paper.

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Voices (2)

  1. Michel Kilzi:

    Some Oil production Markets will drive growth in Supply Chain Finance. Such Oil dependent economies are diversifying their industrial investments. We are witnessing some working capital optimization needs in the Gulf region. Other countries being affected by currency devaluation such as Egypt and Turkey will witness high growth in trade finance and specifically on the level of both payables and receivable finance.

  2. Michel Fontaine:

    I believe the longer the terms, as per the article going from 45 to 120 days the easier and more desirable it will be to securitize the proceeds. If you wrap it with credit insurance, it makes it more palatable to banks and other financial institutions even a term as high as 180 days.

    This approach brings back the 2nd challenge is securitizing receivable, the servicing of the accounts. You can either a) led the obligor collects the receivables for remittance b) automate the process through a claimant platform.

    I believe we will see more and more expanded payment terms as interest goes up and as the appetite for higher returns increases.

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