The drying-up of the liquidity pool and the implementation of stricter regulatory proposals, such as the
Basel III capital adequacy regime
, has reduced banks’ ability to lend to corporates and dented global bank dominance.
However, the impact of this retrenchment on corporate funding has not been as severe as many predicted. Indeed, corporates have simply started to look elsewhere – leading to the evolution of a more diversified, financial landscape.
This new financial landscape is made up of several varied players rather than a few dominant global banks, creating opportunities for both regional banks and alternative financiers, as well as for corporates seeking innovative and diverse funding solutions.
End of an Era
Pre-crisis, global banks were the dominant player in the financial landscape for treasurers. The worldwide financial crisis of 2008 has, however, severely hit banking liquidity – a problem accentuated by the need to meet increasingly stringent regulatory requirements. The Basel III regime, which is being implemented this year, is especially pertinent in its requirement that banks keep more capital on their balance sheets, which, in turn, means less capital to feed their respective corporate clients.
At Falcon Group’s most recent annual trade and corporate finance forum, David Smith, economics editor of The Sunday Times, discussed the fall in global bank funding. He explained that banks’ moves to prioritise investment-grade companies and core-business has left many corporates unable to access bank funding.
Of course, the incentive to lend to trade corporates is further lowered by the capital adequacy requirements of Basel III, which are unduly harsh on trade finance and therefore make it an expensive option for funding. And while the
Basel Committee has softened its approach
in this respect, many still feel that its concessions have not gone far enough.
This is unwelcome news for the emerging markets, where companies’ reliance on trade finance is greater than in the developed markets. What’s more, funding is further constrained as European banks yeild to pressure to favour domestic markets and withdraw from the emerging markets. “It will be some time before western banks will fund growth in the emerging markets again,” Smith warned.
An Alternative Future
Despite the withdrawal of global bank funding, all of the speakers at the trade and corporate finance forum agreed that the emerging markets, particularly Asia, have experienced rapid growth.
“Asia was better prepared to handle the financial crisis than the more developed markets, as the region’s 1997-98 crisis encouraged financial discipline,” explained Smith. “Now two thirds of global economic growth is coming from the emerging world, and only one third from the advanced world.”
“By 2025, four out of the top five global economies will be in Asia – China, India, Japan and Indonesia,” said Mike Moore, former director general of the World Trade Organisation (WTO), reiterating the optimism surrounding Asia.
So who is funding this growth? Many of the larger corporates are able to use their own funds to finance working capital and trade, but this may only present a short-term solution to a lasting problem. Otherwise, companies are increasingly turning towards regional banks and also alternative financiers, which have been filling the void since global banks first started to withdraw corporate funding.
The forum offered insight in this respect through speaker Philip Jan Kok from Galena Asset Management, a specialist trade finance fund and wholly owned subsidiary of Trafigura Group. “A machine doesn’t run without oil,” said Jan Kok. “And this need [for liquidity] is being met by the rise of alternative financiers.”
Indeed, the financial crisis acted as a platform for alternative financiers to demonstrate their value to corporates and the benefits their funding solutions offer. Certainly, speed and flexibility stand out as two such benefits. Smaller in size than global banks, alternative financers are able to act quickly, and easily adapt to new markets, and the individual requirements of clients. Often, the small size of such financial institutions (FIs) means a deep relationship with the client and therefore a comprehensive understanding of their needs. Given this, solutions tend to be sophisticated and bespoke.
Microsol International, a global solar cell manufacturer based in the Middle East, discussed with forum delegates how these advantages, and in particular the flexibility of alternative financing, has helped it access the most appropriate funding solutions for its needs.
“Not only is global bank funding becoming increasingly hard for corporates to access, it is also fairly generic,” said Suri Penubolu, the company’s director of marketing and business development. “Their off-the-shelf solutions do not work, as they cannot keep pace with our ever-developing business and fast-changing requirements. Alternative financing is more flexible and suited to our company.”
What’s more, the rise of alternative financiers offers corporates the opportunity to diversify their funding options, and reduce their banking risk.
“Corporates do not want to have to depend only on banks,” said Galena’s Jan Kok, voicing corporates’ desire to diversify their funding options. The rise of alternative financiers and regional banks is contributing to a financial landscape that offers corporates more variety and sophistication for their funding needs.
As corporate treasurers grapple with their own liquidity and working capital issues, the ability to access a new funding landscape capable of supporting company needs through diversified lending solutions can only be viewed as a positive for all concerned.