Bankers worry about many things in the present climate, but the foremost issue in their minds is regulation. And while regulatory changes are already having a highly visible impact on the size and shape of banks’ balance sheets, the effects are also being felt in areas of transaction banking such as trade finance and payments.
Regulation was a key discussion topic at Barclays’ fifth annual global banking symposium held last month, attended by 73 bankers who represented financial institutions from around the world. Asked to name the single most significant concern for banks right now 52% of attendees answered ‘regulation’, while 21% cited ‘lack of capital’ and 20% opted for ‘funding’.
Most of those present agreed that the widespread deleveraging now being undertaken by banks was substantially driven by changes in Basel regulation. However, even the certainties of regulation are laced with unknowns. There is much uncertainty over how quickly regulatory shifts – for example in risk-weighted assets or accounting trends – will be enforced in different jurisdictions. This regulatory arbitrage creates unsettling mismatches and imbalances.
These issues are pertinent to banks, and by compelling them to make choices over what they do or do not regard as core businesses the ripple effects are being felt in different parts of their organisations. One affected area is trade finance which, in turn, is affecting trade itself.
World trade suffered the impact of the sub-prime crisis and is still not back to a normal state of health. As the process of deleveraging continues, it remains vulnerable to volatility in the liquidity and pricing of finance and that affects people’s ability to move goods from A to B. Some large institutions have already taken the decision to reduce their exposure to commodities finance, including some of the biggest continental European players in this sector, thus potentially stunting growth at a time when it’s most needed.
The surprise retrenchment caused trade finance prices to spike in the fourth quarter of 2011, with spreads over Libor almost doubling for certain regions. The increases disappeared almost as quickly as they had come, and were back at or even below their original levels by the first quarter of 2012, but the message is clear. As it becomes harder for banks to support trade flows more deleveraging – regulation, in other words – will create more volatility in trade finance. It’s worth noting that 58% of bankers at our global symposium expected further material episodes of deleveraging in the months and years ahead, while another 37% anticipated deleveraging ‘to a limited extent’.
This assumption is creating a further effect by encouraging the emergence of new partners in trade finance as insurers, reinsurers, hedge funds and pension funds move into the space being vacated by banks. The new players have been quick to recognise the favourably low-risk nature of the business and, more importantly, an opportunity to arbitrage the differences in regulatory burden placed on the banks and on themselves.
These new investors should be seen as credible partners rather than as threats. They do, however, need to appreciate that trade finance is not a homogeneous product in the same way as auto loans or credit cards. Here they are not buying product risk but business risk, investing in a business made up of multiple parts.
One positive development has been a stronger, more cohesive voice from the banking industry, as it recognises the need for a more equal dialogue between bankers and regulators. That voice is now making itself heard in international forums such as the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the Basel Committee. The latter has already been persuaded to exempt trade finance from some of Basel III’s more onerous requirements.
When it comes to engaging with regulators, bankers – and this includes Barclays – have become more conscious of the value of industry bodies to both banks and the regulators. The pivotal international industry group for transaction banking is BAFT-IFSA, the association formed by the merger of the Bankers’ Association for Finance and Trade and the International Financial Services Association. Barclays’ vice chairman of corporate banking, Jeremy Wilson, is BAFT-IFSA’s first non-US chairman. This focus on industry bodies is also true elsewhere in the payments industry, where regulation is demanding change in multiple jurisdictions across the globe.
The UK payments regime is just one of many that will have to undergo significant adjustment even though, as a key piece of infrastructure, it distinguished itself during the crisis by never failing. The government is nonetheless concerned that payments should be faster and more transparent. The resulting rationalisation of UK payments systems under the eye of the Payments Council will see a transformation in costs, innovation and the number of participants, while placing heavy demands on the payments infrastructure.
The Clearing House Automated Payments System (CHAPS), the UK’s same-day payments system, currently has 18 direct member banks and 337 indirect participants. While the number of indirect members is being increased, the UK regulator believes that CHAPS’ direct membership is too small for stability. Consequently, a call for more direct members is already underway.
While regulators impose change on banking, it is important for banks to be proactive on their own account. They must acknowledge their place in society and remind others that they do so, on both a domestic and an international level.
Barclays’ engagement with other industry bodies demonstrates what needs to be done in the wider community. Its good citizenship programme includes the banking environment initiative in which 11 global banking institutions, at the instigation of their chief executives and chairmen, are collaborating with consumer groups and corporates to do more for the environment.
A greater focus on the social purpose of banking will serve the industry well, but it is unlikely to stem regulatory change any time soon. We asked our global symposium bankers if they thought the emerging regulatory regime was achieving the right balance between safety and competition; only 19% of them said ‘yes’ while 58% believed that further discussion with regulators is needed.
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