DE-RISKY BUSINESS - Global Trade Magazine
  May 1st, 2017 | Written by

DE-RISKY BUSINESS

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Banks today find themselves in a rigorous regulatory environment. Financial institutions worldwide have regulators breathing down their necks, making sure they are not in violation of anti-money laundering legislation and sanctions regimes.

The ultimate aims of these compliance programs are laudatory, but they have also adversely affected global banking and the practice of trade finance specifically. The tightening regulatory noose has led to a phenomenon in the banking industry known as de-risking.

De-risking, as the word suggests, means that banks are taking steps to lower their exposure to risk, including potential compliance problems. As a practical matter, de-risking takes a number of different forms.

In some cases, banks have dropped entire portfolios of business, including trade finance, because of the inherent and growing risks involved in those areas. In other cases, banks have “exited” individual customers they consider to be too risky; in other words, they have shown them the door, dumping them.

International banks have also terminated large numbers of relationships with correspondent banks, the foreign entities they cooperate with on cross-border transactions, including trade finance. A 2015 World Bank report indicates that around half of all banks and 75 percent of large international banks have shown a decline in correspondent banking relationships. One of the top three areas most affected by this relationships withdrawal is, not surprisingly, trade finance.

On the whole, the global trade landscape is riskier now than it was a few years ago. The heyday of globalization appears to have passed and gone are the days when liquidity flooded the market and everyone thought we were headed to a low-risk, seamless global framework. The financial crisis of 2008 and 2009 burst that bubble and recent developments—from Brexit to the election of Donald Trump—have increased risks for international traders, including U.S. exporters and the financial institutions that serve them. Enhanced regulatory scrutiny has also increased the cost of capital, making trade finance services more expensive.

All of this means that many American exporters—and small and midsized ones especially—may be, or should be, looking for new banking relationships to help them with international trade. The good news is those banks that have maintained international trade departments are likely to be the ones most dedicated, experienced and expert in that craft.

These tend to be larger national and multinational banks. But smaller exporters shouldn’t fret: The banks report a convergence in the export finance needs of enterprises large to small, which means that they can feel comfortable serving the trade finance needs of all sizes of exporters, including relatively small ones.

In such a complex environment, exporters should be asking not only what the banks can do for them but what they can do for the banks. In other words, exporters should be looking to put their best foot forward and to groom themselves as attractive customers for international banks.

“All banks, including foreign banks operating in the United States, are facing the de-risking trend,” says Daniel Son, head of U.S. Trade at Wells Fargo Bank. “They are all trying to consolidate risk and focus more on their core competencies. In many cases, that means exiting non-strategic banking areas and cutting down on unnecessary accounts and less strategic relationships.” Smaller commercial banks, especially, are no longer offering the full spectrum of services to their customers.

Anti-money laundering regulations and sanctions regimes are the main compliance areas that international banks face, two areas that are particularly sensitive when international trade transactions are involved. “In the current environment, banks must not only know their customers, they must know their customers’ customers,” says Inwha Huh, regional head global trade finance at HSBC. “This has led banks to exit portfolios and clients, lower credit limits and, in some cases, getting out of doing business in certain countries.”

“Compliance and regulatory responsibilities continue to increase and add to the cost of capital,” explains Jonathan Heuser, head of Global Trade, Commercial Banking, at JPMorgan. “Clients need to be prepared that their bank will ask for in-depth information about their businesses, flows and counterparties.”

Banks will probe new and existing customers for much more information than they have in the past, and the customers had better be open to remarkable levels of transparency with their bankers. “Exporters need to understand the regulatory environment that banks face,” says Huh. “Exporters can educate themselves on what banks will require from them. They need to know which are the sanction countries and they need to be prepared to provide all of the information that the bank asks of them. The de-risking trend shouldn’t scare bank customers if they are doing their homework and being transparent.”

In many ways, banking is a relationship business and, as banks become more selective about their client bases, customers with established and wide ranging relationships with their financial institutions are more likely to come out ahead. “The banks will always provide the best service to a business with which it has a relationship,” says Robert Kurek, senior vice president for International Financial Institutions at KeyBank. “The more business they have done with a customer, the better the bank is willing and able to tailor services to those clients and to cater to their individual needs.”

“Banks are focusing on clients that have holistic banking relationship instead of one-off export transactions,” added Heuser.

Some smaller exporters may fear that when working with a large bank they will end up being a small fish in a large pond and won’t get personalized attention. “I advise exporters to look for banks with global capabilities that fit their business needs and for a partner that is able to give thoughtful advice,” says Heuser. “We can and do provide the right mix of services to companies at various ages and stages. We provide a full suite of products to help them get paid, manage risk, access finance and offer better trade terms.”

“We have found that the needs of small and midmarket exporters and large multinational exporters are converging,” says Huh. “It used to be that smaller exporters were focused on guarantee programs and export collections while the larger clients were looking for capital optimization and supplier programs around the world. Smaller companies are now becoming just as savvy. They want to sell their receivables to us to get liquidity and are also moving into medium and long-term project finance.”

Exporters and their banks may face challenges in the current environment, but these are surmountable. “They are going back to basics,” says Heuser. “Exporters are growing their businesses by reaching new customers in new markets while getting paid and managing working capital and risk effectively.”

Traditional trade instruments, such as letters of credit, discredited by some in an era of open terms and for being expensive and cumbersome, have made a resurgence in new guises. “Exporters are using letters of credit to offer more aggressive sales terms and to access financing to manage cash flow,” says Heuser. “More exporters are using trade credit insurance and EXIM Bank programs to manage customer risk. Exporters bidding on deals can offer not only a great product at a good price but financing to help the customer. That can be the killer app that puts a bid over the top.”


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