As we have read in the media, there have been a number of very high profile banks announcing that they retreating from the Commodity Trade Finance (CTF) Space, with BNP Paribas, ABN Amro announcing a 6-12 month wind down, SocGen closing the Singapore hub, ING and Rabobank both reviewing. These announcements are merely the acceleration or inevitable outcome of a retreat from the space by the major banks which has been ongoing for some years now. There a number of reasons cited in the media: high profile losses, the slow down in global trade, the COVID impact and that a typical CTF transaction is a paper rather than an electronic-driven process and therefore labour intensive and, as such, people working remotely create additional challenges.
A key driver though would seem to be the regulatory changes that have led to banks having to allocate greater amounts of capital to CTF transactions. This is compounded by the fact that historically, CTF lending has been very cheap - trading at LIBOR plus a few basis points would not be at all unusual for the larger firms and that is not a great return in the current zero interest rate environment. It could be argued further that banks have never correctly priced the risk of CTF activities - indeed whilst they may call various products CTF or Structured CTF, the truth of the matter is that banks were often behaving more like balance sheet lenders.
What is apparent, and was already happening before these recent withdrawal announcements, is that there are growing geographic differences in terms of the ability of traders to access CTF. Where the biggest impact is most likely to be felt, and often the target of the most recent announcement, is Asia. For example, BNP Paribas and Brown Brothers are still lending to new transactions in the US.
Further reading:
European banks lose appetite for commodity trade financing
Commodity traders face rising finance costs as big banks pull out
BNP Paribas to halt commodity trade financing from Geneva
In terms of impact undoubtedly the biggest impact will be felt by the small and medium-sized traders (note the earlier comment about capital charges) as these are the segments that banks have been pulling back from for a while. The larger global players are not likely to feel the impact quite as badly as it is likely that banks will continue to lend to these institutions through corporate banking and other products. The larger global players also have access to the public capital markets so the only likely effect on them will be that they will no longer be able to build very large CTF credit line reserves.
Whilst SME’s are far more likely to be impacted by this, on a positive note Altimapa continues to see an increased flow of funding particularly from the private debt markets, both in terms of funds available but also an increase in the number of participants interested in the debt space.