By the end of 2021, LIBOR, the reference rate for tens of millions of financial contracts worldwide, will be replaced by SOFR and other “risk-free” replacement interest rates. BNY Mellon’s Joon Kim, Global Head of Trade Finance Product and Portfolio Management, Treasury Services, explains the impact that this move away from LIBOR will have on the trade finance market and discusses how banks can prepare to navigate this change while continuing to provide a smooth service to their trade finance clients.
As the months roll on, the full effects of the Covid-19 pandemic have become clearer across the globe. Without a doubt, among the hardest hit regions has been Latin America. But despite the difficult health situation, banking systems have, so far, responded well to the socio-economic impacts of the crisis.
Trade, a crucial component of healthy economies on all ends, has flourished over the past 20 years, and trade finance is the essential ingredient that has enabled its growth. The ICC’s 2020 Global Survey of banks worldwide asked participants how they planned to broaden their trade-finance provisions, even in the midst of a pandemic. For most, further digitalisation is part of their plans alongside increased market participation and product offerings.
While COVID-19 continues to harm people in every corner of the world, international practices, such as trade, have the potential to produce a multitude of benefits and support economic recovery from the crisis. But trade depends on the availability of trade finance; today, more than ever before, cooperation between public and private sectors is required to both navigate out of the calamity and rejuvenate top pre-COVID-19 goals such as sustainability.
Though there are serious threats to global trade from potential trade wars, it continues to flow. Like clean drinking water, trade and the trade finance that secures it, are crucial to the health of the global economy and to that of individual nations. How can trade and trade finance be nurtured, especially in the face of costs and tensions that threaten to turn off the tap?
Trade finance fuels trade; if firms are unable to access it, this can have significant consequences for business development and global commerce. The current US$1.5 trillion gap between the demand for and supply of trade finance is undeniably a substantial barrier to economic growth. A recent BNY Mellon survey canvassed industry participants to discover what steps they think should be taken to close the gap, and the results point to two potential sources of relief: technology and regulatory revision.
For Better or for Worse: The Linkage Between the US Economy and the Major Economies of the Western Hemisphere
The US economy is on track to break its own record; its current 115 months of expansion is only five months shy of the record set in the 1990s. The next recession will come, maybe soon, as the economy succumbs to factors such as policy errors, foreign growth and corporate profit. And the United States will not fall alone; other Western Hemisphere countries will be dragged down with it.
Since trade finance is lifeblood of global business, it has a positive role to play in driving sustainable practices. Here, banks can lead by example: through collaborative efforts, they can play a crucial role in encouraging a diverse network of counterparties to safeguard environmental, social and governance (ESG) principles, while also stimulating growth. So, how can “sustainable trade” be fully realized to meet these ends?
In spite of the recent rise of protectionism amongst major trade partners, international trade growth is strong, with emerging markets providing the main impetus. Trade growth could be even stronger if not for the shortfall in trade financing supply relative to demand, a gap that is partly due to regulation compliance. Technology is coming to the rescue, not only in addressing the trade finance gap but ameliorating operations throughout trade channels.
Money laundering and terrorism financing are serious issues that banks must address, especially as too many financial institutions are complicit in enabling the flow of unlawful funds. Unfortunately, the need to act decisively has also resulted in a disabling tightening of trade finance, sorely needed for economic growth. The new Asian Development Bank Scorecard seeks to ameliorate the inadvertent consequences of AML and CFT compliance.