It’s a certainty that new regulations will raise the cost of doing business worldwide. And according to consultancy Greenwich Associates, a big driver of cost increases in trade finance will be Basel III. The good news is that although new capital rules have caused many banks to step back from offerings (read, European banks), other banks and non-banks are stepping in to fill the void.
Since the onset of the European debt crisis, Europe’s banks have pulled back from trade finance, particularly in Asia. However, many Asia banks have stepped in to fulfill trade finance needs. Still the environment is ripe for new entrants into the sector, according to Greenwich.
But despite the inviting environment, Greenwich says progress has been slow. “[O]pportunities for investor-driven trade finance are materializing at a very slow pace,” the consulting and research firm said. And the reasons are that significant barriers remain, including “a lack of easily accessible data on pricing and other transaction information, the lack of standardized documentation on transactions, and a settlement process that one market participant calls ‘fiendishly difficult.’”
Alternative sources of trade financing have been discussed ever since European banks began pulling back on the transactions. Several large trading firms have been considering launching trade finance funds. Federated Investors is one firm that launched a trade finance portfolio fund in the last year called The Fibonacci Master Fund, which is managed by UK-based GML Capital.
According to Greenwich, these types of funding arrangement will continue to proliferate. “Given the high levels of demand for trade finance among companies around the world, the new capital pressures on banks and the potential benefits to investors, it is certain that this market will continue to develop at a steady, albeit slow, pace,” Greenwich said.
Treasurers are very familiar with the mantra of “do more with less,” so they are eager to leverage any process that can save money and at the same time add benefits. And trade and supply-chain finance in many instances can do just that. Cleaning it up, getting it better organized and adding the right partner – banking or otherwise — can help free up working capital, mitigate risk and offer operational efficiencies. If Greenwich is correct that more players will enter the market, that will suit treasurers just fine.