YOU can make a good living buying a kilogram of rubber in the Ivory Coast for 50 cents and selling it in Singapore for $1.50. But you would need to buy 10m kilos to make the deal worthwhile. Traders who do not have the necessary $5m must borrow it. Before the financial crisis, big banks like BNP Paribas, Citigroup, HSBC and ING deployed $14 trillion a year on such deals. But new regulations and swingeing fines for serving shady customers, in addition to falling commodity prices, have caused that figure to halve, leaving a host of new lenders jockeying to fill the gap.
The money that commodity producers borrow to help them dig, grow, store, transport or otherwise market their wares is vital to the global economy. But commodity trade finance, as it is known, is having to find new arteries. It is not that banks have lost lots of money in trade finance—far from it. The commodities being shifted serve as collateral for the loans used to buy them, limiting the scope for losses. Instead, the business has become an unintended victim of post-crisis regulation.
A cap on leverage at banks has hit European lenders, the powerhouses of trade finance,...Continue reading
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