In the wake of the financial crisis, tighter regulation of banks hit trade financing banks hard, with an estimated $1.5 trillion shortfall opening up between the demand and supply of trade finance. This funding gap already represents up to a fifth of the trade finance market, and it looks set to grow with the impending implementation of Basel IV.
Such a shortage of funding has put new pressure on the finance functions of trading firms, who can no longer rely on established banking relationships to meet their requirements, which is leading to a wholesale upheaval of talent demands across the trade finance landscape. The banks are no longer demanding the skills that they once were, and traders are looking to overhaul their in-house functions.
On the institutional side, we see banks increasingly focused on hiring individuals who are process-oriented and can help their financing platforms transition from the bespoke offerings that they once were towards more high-volume, low-costs operations. The banks are focused on paring back risks and embracing new technology in order to revamp their legacy systems, and they are losing structuring talent while seeking to bring in tech-savvy hires.
Meanwhile the trading firms are looking at alternative ways to fund deals and monetise their balance sheets, whether embracing revolving credit facilities, principle investments or prepayments, turning to alternative capital providers or even setting up internal banking functions. The traders are now seeking to attract far more creative people with the structuring skills and understanding of risks to come up with new solutions.
At the same time, the traders face their own challenges as a result of regulation. A leading agriculture financier says: “The traders have historically been the financiers, but with the pressure on the industry to meet greater traceability requirements, funding agricultural commodities in order to trade or swap the product does not work for traders. Instead, traceability requirements push the financing back to the strongest player in the supply chain, who is generally the producer.”
He says: “There is a difference in markets like Mexico cane, where there are government-backed, agricultural development banks who provide cheap financing to the growers, versus other jurisdictions where the traders or the production businesses have to fund the growers and take on the market price exposure and default risk.”
Beyond the banks and the trading firms, there is then a swathe of new market entrants competing to staff up with innovators of their own, who can bring strong structuring capabilities into specialist funds or fintech businesses.
The non-traditional debt finance players are all hungry to hire former investment bankers or those with extended contact with development banks or trade finance funds, as they look to work within the banking system to deliver innovative solutions. Specialist private credit providers are seeking to bridge the gap between institutional investors and physical producers by working alongside bank-originated transactions, in a way that may allow them to provide the collateral required in the context of the new regulations.
Then there are the fintech companies, who see technology and blockchain as part of the solution to the funding gap given their ability to improve access to information, increase the speed and transparency of transactions and assist with traceability. There is already the beginnings of a flow of talent out of the banks and into the block chain businesses, which are crying out for talent with a deeply granular understanding of the underlying business challenges that is not steeped too deeply in the old-school approaches to technology.
Kent Hilen, former Managing Director at ICBC Standard Bank, says: “Banks are losing structuring talent, since they need to focus more now on process issues. Those people are going into commodity traders, specialised funds and certain types of wealth managers, such as single and multi-family offices, who are willing to put capital to work without relying on their traditional bank partners. Banks, on the other hand, need more technology-savvy people who can help to overcome historical silos. Everyone needs more creativity.”
A COO of an Independent Oil & Gas company, says different skillsets are required now that finance teams need to be much more imaginative, pointing to the need for knowledge of SPV structures, capital raising, credit risk syndication, fintech and blockchain technology. He says: “On a more traditional aspect, knowledge in off-balance financing and optimisation of the treasury is now much more important to help with balance sheet and cash optimisation.”
It is important to note that the reduction in trade finance availability is not impacting all borrowers in the same way, with the bigger, more active banks still lending to larger firms in developed countries, while shifting their portfolios away from emerging markets and the smaller trading businesses. Such a shift may be motivated by more than simply regulatory pressures, with shareholders and other customers also potentially exerting pressure on banks to move away from the risks associated with financing mines in Africa, for example.
What is abundantly clear is that trade financing can no longer be reliably outsourced to the banks, and instead, given the long-term trend towards tighter trading margins in various maturing commodity trading sectors, finance has become much more central to the trading business.
Over time, it therefore looks likely that the movement of talent will be out of the banks and into the trading firms, who will continue to invest in expanding their own financing functions, but must do so against the backdrop of enhanced competition for the best structuring talent from incoming fintech businesses and alternative lenders.