The hangover from the financial crisis has been a long one, not least in the banking market where regulatory pressures are adding to banks’ own efforts at deleveraging. The result is that even long-standing clients have found access to credit increasingly difficult, with borrowing costs also on the rise. And this has been the case with both secured and unsecured lending, and for tenures ranging from the short to the long term.
Indeed, in the UK, Ireland, Germany, France and Spain, banks have announced plans to shrink their balance sheets by around €775bn over the next two years, some by selling their existing loan books and many more by restricting the amount of new lending they agree.
A Desire to Grow
Certainly, many of the largest corporates are surviving without the help of banks, using their own funds to finance working capital and trade. However, such efforts are a short term solution to an on-going problem, and they are inadequate compared to the funding levels required for growth.
Indeed, corporates remain focused on growth, despite the unfavourable economic climate: something that is particularly true in the emerging markets where bank lending has been further constrained by the need for bailed-out global banks to concentrate on their home markets.
For many lenders this represents a lost opportunity. Emerging markets are becoming more significant to global trade flows and worldwide economic growth, with recent research demonstrating that, by 2030, emerging markets are likely to represent 70% of the world’s US$180 trillion gross domestic product (GDP), compared to 52% of US$73 trillion in 2010. Such growth, however, requires capital.
An Alternative Solution
So far, in both developed and emerging markets, the constraints in the bank-lending arena have been critical. Yet bank funding is not the only answer. If blocked, corporates should simply find another route, perhaps through alternative financiers who can step into the funding gap to offer imaginative solutions that overcome balance-sheet constraints.
Alternative financiers are often more appropriate for solving corporate funding needs than large banks. While they do not have balance sheets large enough to match the global banks on pricing, alternative financiers are able to compete through the structuring of complex bespoke solutions. They are imaginative in terms of the security packages and flexible in terms of the solutions they can provide.
In fact, their smaller size acts as an advantage for corporates. For a global bank to customise individual transactions for corporates, particularly those in emerging markets, requires a long and involved structuring and sign-off process, with the final structure often geared towards what a bank’s credit committee will find acceptable, rather than what suits the client. Meanwhile, alternative financiers can develop more engineered solutions that are focused purely on the needs of the client. This is further aided by the fact they are less constrained by the regulatory restrictions imposed upon global banks.
Indeed, the financial crisis has been a boon for alternative providers such as Falcon Group and we are far from alone. New providers are appearing regularly, many set up by former bankers frustrated that the current banking environment can no longer support their client base (that they may have built up over many years). I welcome these new entrants, not least because the retreat from bank lending is a long way from complete.
Bank liquidity is not coming back anytime soon, so the more new players to showcase a credible alternative, the better.
A decline in the return on capital employed of globally listed companies over the last decade has been noted in recent EY and PWC reports. This is despite businesses taking an increased focus on balance sheets since the financial crisis in 2008.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?