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Commodity traders face rising finance costs as big banks pull out
Commodity trade financing by the world’s banks is drying up at a rate not seen in more than 20 years, leaving small and medium sized firms most exposed, banking and trading sources said. Banks are retrenching after the chinavirus crisis led to defaults by some trading houses, intermediaries in the global movement of oil, metals and agricultural goods which link producers and end-users, and also exposed a series of frauds.
this would have habbened either way as the system is beyond it's stretching point-they just use the virus as an excuse to cover for it's lack of any regulatory enforcement, so now the big banks are pulling funding.
This week Dutch bank ABN Amro, one of the biggest commodity trade financiers, quit the business after it was among the banks worst hit by the $3.8 billion default of Hin Leong, one of Asia’s biggest oil traders. About 80% of global trade is intermediated by trade finance- which covers the loans, most commonly in the shape of a letter of credit (LC), that are crucial for the movement of goods from wheat to gasoline and reduce payment risk for counterparties when cargoes change hands.
Credit facilities allow merchants to juggle multiple transactions, but with competition between banks set to fall, credit costs will rise for trading houses, which are typically highly leveraged and rely on trade finance. Big banks seeking to reduce trade finance exposure are likely to favour lending to the well established large independent merchants such as Vitol and Trafigura. Meanwhile, smaller players will likely see their options limited and their credit costs rise as they are forced to turn to second tier banks. “Banks exiting will create a massive black hole for small traders and will increasingly put the oil market into the pockets of majors,” a senior oil industry source said.
Trading and banking sources say others may follow ABN and that some banks have already frozen existing credit lines, letters of credit and new business. Major traders have been big users of revolving credit facilities (RCFs), where a consortium of banks allow a company to repeatedly borrow up to an agreed upon maximum threshold.
However, banks dislike these loans as they are not only cheap for the borrower but also unsecured, with short maturities of usually no more than a year which must be renewed. Depending on how many banks exit or reduce their commodity financing, even large traders may not be immune, potentially driving those with assets to the capital markets.
But this would not be enough to fill the whole gap. Bankers are already focused on further regulation, with new requirements under the fourth phase of the Basel Accord, expected to have unintended consequences even though they do not focus on trade finance.
Basel is seeking to standardise how banks calculate risk-weighted assets to protect them from losses, which bankers say will make commodity finance even less appealing.
https://www.reuters.com/article/commodities-trade/commodity-traders-face-rising-finance-costs-as-big-banks-pull-out-idUSL8N2FF747