Searching for New Ways to Deal with Trade Finance Risk

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Some of the world's leading trade finance providers met in London recently to discuss the challenges facing their industry. . Global Finance's editor Mark Johnson moderated.

* Global Finance: As we all know, it has been a messy, volatile time in markets recently. How has that affected the world of trade finance?

VALENTINO GALLO, global manager, structured trade finance, Citibank: The appetite for risk, credit risk in general or political risk, has definitely declined during the last 12 months. The emerging markets syndicated loan market year-to-date is down more than 50% compared to last year. Banks are reconsidering their lending strategies toward emerging markets.

While normal risk distribution channels are shrinking, what you are seeing is the growth of alternative risk transfer solutions and the separation between funding and risk taking.

In order to get a trade financing arranged, you have to look which risk mitigation tools are available. The export credit agencies and the private insurance market have become important sources of credit enhancement solutions, even though during the last few months the appetite for risk in the private insurance market has also been negatively affected by the volatility of the markets.

GAVIN MELLUISH, associate director, global trade finance, BBVA: We are actually seeing banks moving in two different directions in terms of their selection of risk in trade finance, and the interaction between those two movements is creating, I think, a new sort of trade finance market. On the one hand, we are actually seeing a retreat into niches by a lot of banks that are focusing on geographical or product areas where they feel comfortable. At the same time, given the volatility of the market and given people's fears about straightforward bread-and-butter lending, we are seeing more and more highly structured deals. The irony of this has been that, actually, the ability to create highly structured deals in things like oil finance is taking some banks into parts of the world that they would not have touched with a bargepole in the past. The idea of a lot of international banks getting into Kazakhstan, for example, is something that five years ago would have been unthinkable.

GF: How much of global trade finance flows would you describe as structured in any way?

MELLUISH: I would say 10% to 15% by volume, no more, is structured by most people's definition, but in terms of their profile in the market and the amount of profit that they are making for banks, their importance is considerably higher. They are the pioneering deals, and therefore they have an importance in the development of trade finance that far exceeds their actual numerical weight.

LUIGI LA FERLA, chief executive officer, LTP Trade: In many respects, trade finance is one of the last products that is not driven by demand. It operates in the way Henry Ford famously once said, "You can buy the Model-T in any color you like as long as it is black" Likewise, in trade finance it is currently less a question of what the client wants but instead is driven by the banks asking themselves, What is the risk my bank can take, what are the constraints my bank has, and what is my cost of capital? Banks nowadays are very much looking for their own niche to capitalize on their own expertise when delivering to the client, but without putting the focus on what the client wants or making a strong effort to communicate this to them. In such a market as trade finance, being driven by suppliers and not by the consumers of the product and where suppliers are sometimes working in a vacuum without reaching out to their clients, the question becomes how exporters become aware of what possibilities of supply exist. The lack of transparency and access in a market that has attempted to defend a supplier-driven position is actually killing the trade finance market, to nobody's benefit. …