New Basel III bank capital requirements are poised to increase pricing on trade finance which could accelerate the development of alternative sources of credit — including trade finance funded by non-bank investors, according to a Greenwich Associates report.
The "Global Trade Finance: Basel III Capital Rules Open Doors for Alternative Sources of Funding" report says that while companies around the world express concerns about this development, an increase in trade finance costs would have a particularly large and negative impact in Asia, where companies’ reliance on trade finance as a critical source of funding is higher than in developed markets. Already, European banks that have been major suppliers of trade finance in Asia are pulling back, largely as a result of the new capital rules.
Although local Asian banks and Japanese banks are stepping in to fill that void, conditions appear to be in place for the emergence of alternative sources, says the report.
One of those sources will likely be trade finance funded by non-bank investors, with participation facilitated via institutional funds or structured products. In the current era of historically low interest rates, investors hungry for sources of attractive returns could be enticed by the incremental yield, low volatility, low duration and diversificationbenefits of trade finance.