Cash Management: Europe Companies Say Regs Will Hurt Trade Finance

November 13, 2012
Greenwich Associates survey reveals worries in Europe that regs like Basel III will crimp international deals.

Bond2The green shoots of trade finance could wither in Europe. According to a survey by Greenwich Associates, eight out of 10 finance officers of European companies say they expect the cost of trade finance to increase after Basel III is implemented.

Over the past year, large global multinational companies have been looking to improve working capital and more efficiently manage the supply chain. That’s why the concept of trade and supply chain finance (SCF) is rapidly gaining favor again as a practical way for banks to meet buyer and supplier liquidity needs within a tighter regulatory framework. That framework of course – particularly the implementation of Basel III – will likely raise the cost of capital of asset-based strategies for banks, and consequently, the cost of trade finance will remain a top strategic concern for businesses of all sizes.

In the “2012 European Trade Finance Study” Greenwich said 80 percent of the 300 financial officers from large European companies, including nine out of 10 from the FT 500, expect the implementation of Basel III to increase trade-finance products and services pricing.

And it’s not only the pricing; it’s that these services might get scarce. Companies are “also keeping an eye on banks’ shrinking risk appetite and the availability of trade finance in their important markets,” said Greenwich Associates consultant Dr. Tobias Miarka.

Banks exiting the trade finance market has been a concern for many multinationals based in the US. That’s because the tighter regulatory environment will make it harder to make any profit. This would in turn have made efficiently executing supply chain finance a little harder; however, other global, non-bank solutions would likely to step in to fill the gap.

But banks are in better shape in the US than their European cousins. As such, they might not be able to fulfill the needs of companies there. Greenwich said European firms use trade finance products like guarantees, import/export finance and open-account finance “first and foremost as a means of mitigating individual counterparty risks and exposures.”

In terms of where they direct trade finance flows, European companies use it most often for transactions in Western Europe and the Asia-Pacific region, Greenwich said, with 64 percent use in Western Europe and 62 percent for Asia-Pacific transactions.

And what banks are used the most? According to Greenwich, Deutsche Bank and BNP Paribas each are used for trade finance by roughly a quarter of large European companies, making them “the most widely used providers on a pan-European basis.” “Large European companies perceive Deutsche Bank as having a top-rated international network,” Greenwich said.

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