A New Era of Professionalism in Trade Finance
What would you highlight as the key factors influencing your customers’ trade agenda this year?
I think the most important issue on treasurers’ and finance managers’ minds is the impact of continuing global economic uncertainty. No country is now removed from any other in terms of its economic prospects, and the effects of globalisation are nowhere more apparent than in trade. In 2011, world trade grew by just 5%, compared with growth of 13.8% in 2010 as the world’s economies rebounded from the 2008/9 global financial crisis. Although the total value of trade is now at an all-time high of $19.2tr, this is largely accounted for by higher commodity prices, whereas most countries are seeing more or less flat trading volumes (source: World Trade Organisation, April 2012).
Globalisation has meant that a trade transaction is rarely a simple exchange of goods between buyer and seller. Trade counterparties are often in different countries or regions, with intermediaries transferring goods between them. Not only are buyers and sellers of a finished product often geographically remote from each other, but the product itself will frequently be made up of components sourced from many different suppliers and locations, and will cross many borders during its manufacture, assembly, finishing and warehousing.
This complexity combined with economic uncertainty is resulting in greater demands from our corporate customers, both buyers and sellers. Managing risk and liquidity throughout the supply chain is essential from component manufacturer through to the final customer, and requires highly competitive and sophisticated solutions for exchanging documentation, making and receiving payment, and financing transactions. Companies are managing myriad risks throughout this process, including counterparty, country, FX, interest rate, liquidity and regulatory risks. This is where banks such as J.P. Morgan can make a real difference by facilitating and automating trade processes, including the associated cash flows. We finance the supply chain and provide visibility and control over trade transactions and cash balances globally. We also provide risk management solutions that address the variety of risks inherent in the cash and trade cycles.
What impact is new regulation likely to have for corporates engaged in international trade?
The Basel III rules for capital and liquidity have been put in place to strengthen the financial sector and the banks. Unfortunately, some of the rules will have unintended consequences. For example, trade finance is an asset class that is performing extremely well compared to investment banking, clean loans, and other forms of lending. Despite very low levels of default or losses (just 0.002% throughout the financial crisis and during subsequent years), trade finance is being treated as an equivalent risk in terms of the capital and liquidity ratios that banks are required to hold. This will undoubtedly have an impact on international trade by making trade finance more expensive and therefore increase the cost of doing business.
Historically, the trade finance industry has been very fragmented, and currently lacks comprehensive statistics, uniform reporting and product definitions. To resolve this, a group of 17 international banks with a shared commitment to trade finance have formed the Global Trade Industry Council (GTIC), of which I am the Chair. This Council aims to co-ordinate efforts within the trade finance industry to establish more uniformity in its activities, reporting and product descriptions, and to act as an advocate on behalf of its members and the wider industry.
The GTIC is working closely with the International Chamber of Commerce (ICC) to create a permanent trade asset registry which will form the basis of annual reporting that demonstrates the strength and risk-aversity of the trade finance sector. We are keen to invite more banks to participate in the Council, to add weight to proposals and distinguish between short-term trade transactions and other forms of lending in terms of the liquidity and capital ratios that are required for trade finance.