JP Morgan tests derivative based products for Trade Finance
One of the key learning’s and outcomes of the 2008 banking crisis was the need to tighten up control over bank leverage, which in turn promotes de-leveraging and reduces rapid increases in debt. This is primarily centred in Basel 3 which curtails off-balance sheet lending, and requires debt to to be first risk adjusted and have capital held against that risk.
As with anything financial there are always unintended consequences, and those that seek to bypass the new rules. Enter JP Morgan.
JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity
Trade Finance or the financing to provide working capital for imports and exports is experiencing reduction in lending capacity as a result of Basel 3. Trade Finance accounts for trillions of dollars per annum, and will a significant revenue source for JP Morgan.
The interesting shift in this new idea is that Trade Finance would in effect be funded directly by Institutional Investors. The regulators have acknowledged the problem JP Morgan seek to solve, but are hesitant to make more than minor changes to allow banks any dispensation.
It seems to me what JP Morgan are doing is rational, and supports the idea that banks are over levered so locating additional sources of smart funding supports the target of de-risking banks. I keep going back to the idea that banks have become such broad based credit vehicles and deposit taking vehicles that some separation of high volume and high risk from regular peoples finances is a good thing.
There remains plenty of money in the world and if JP can develop new method of wholesale access to it, then that seems in keeping with the spirit of the regulation design.
Someone I know was walking through shopping malls in Washington DC last month and there were many closed stores, including a Banana Republic. That would be unheard of in Canada. The effect of the 2008 crash is still with us especially in US and parts of Europe. The target of re-building a safe banking industry is not easy and will require big adjustments.