Swiss banks are turning their backs on commodity trading
Several major banks have announced in quick succession the closure or reduction of their commodity trade finance departments following a series of bankruptcies and frauds in Asia and the Middle East. These "restructurings" are shaking up the Geneva financial centre where there are fears of withdrawal and of a "domino effect" on an activity which represents 10% of the local GDP.
Why is this important? In recent months, commodity trading has been buffeted by dizzying falls due to Covid-19 and cascading misappropriations that have caused banks to suffer billions of dollars in losses, leading them to reassess their role. By suddenly withdrawing from the market, large providers of funds are undermining one of the most important trades in the Lake Geneva region. International trade in agricultural commodities, energy and metals is estimated to account for up to 17% of the Geneva Canton's tax revenues and thousands of jobs.
Erwan Boubet, CEO of Agro Companies, specialised in wheat trading:
"My big concern is the domino effect that these closures are causing. The problem is that all the companies that are going to lose credit lines will have to find money elsewhere. As the banks become overcautious, it will become difficult to finance oneself; it's very dangerous for the business."
A financial director of a trading SME and former banker :
"When you're in a buying and selling pipeline, if one bank suddenly stops, the others follow suit because they don't want to take the risk alone. All the banks in the market are repositioning themselves, which could have serious consequences for the Swiss economy".
Banks concerned. Société Générale closed its unit in Singapore at the end of July. A pioneer bank in the use of letters of credit to finance the oil trade in Geneva in the 1970s, and long the world's leading bank in the business, BNP Paribas suspended all its financing at the beginning of August in order to reassess its position in the sector. Dutch banks ABN Amro and Rabobank Group followed suit.
Reasons for a debacle. If these frauds - false invoices, untraceable goods, false documents - took place in Asia, Dubai, Germany or the United States, the losses in billions of dollars are shaking the Geneva players. Accused of fraud, Hin Leong Trading, the fuel oil trader in Singapore, dragged 23 banks into its downfall, with losses estimated at 3.5 billion dollars, including those suffered by Société Générale and ABN Amro. At BNP Paribas, no one wants to comment, but according to the Bloomberg agency, the withdrawal would be the consequence of heavy losses related to the trading companies Phoenix Group (Dubai, Singapore), GP Global Group (Dubai) and Coex Coffee International Inc.
A grain merchant in the Geneva area:
"In the world of trading, when liquidity runs out, you either throw everyone out or cheat by telling yourself that you're going to make up for it."
These doubtful debts and previous practices are mostly in the past. But their effects were accelerated by the loss of activity related to Covid-19. Florence Schurch, Secretary General of the Swiss Commodity Trading and Shipping Association (STSA) :
"With the health crisis, those responsible for these frauds were unable to carry out the planned operations and everything collapsed. The banks had financed these companies and controls may not have been able to be carried out. Various countries have different banking laws and control systems from Switzerland. Here, thanks to the Swiss Financial Market Supervisory Authority (FINMA)) and regulations, the situation is different".
Swiss banks had already reduced their financing since the introduction of the Basel II and III standards, requiring an increase in capital. BNP Paribas had also cut back following an $8.9 billion fine imposed in 2014 for violations of US sanctions. An ex-commodity trade finance banker currently working for one of the major oil trading companies:
"It’s a complex and technical business and banks have gradually gotten rid of their experts. Alas, some of them have confused classic trade finance with commodity trade finance where it is necessary to better control the pledge that the bank financing has on the commodity. And this has given potential fraudsters the possibility/temptation to cheat.”
The impact on the Swiss hub. Large international trading players such as Louis Dreyfus and Cargill can rely on bank pools and secured credit lines, and their results show that they will even benefit from the current turmoil. On the other hand, the situation is critical for the multitude of SMEs with up to 50 employees, which do not have the financial strength of large multinationals.
"Almost 85% of our members are companies with 2 to 20 employees. For small companies, the situation is extremely stressful".
Short-term liquidity losses are feared, which would lead to significant credit risks. The volatility of the markets does not help these small players.
Erwan Boubet :
"Small Swiss companies will suffer. If banks move out of trade finance, it will impact all the businesses in the sector".
Solutions. STSA has taken action by organizing a large meeting with all the banks to address the issue. Florence Schurch :
"This crisis can also be an opportunity to rethink the way to trade.”
By looking for new forms of financing. Some traders are betting on the arrival of new players such as American and Chinese banks - City Bank, Goldman Sachs, Bank of China - to continue to develop Geneva's expertise in a different way. Big funds like Inoks or SCCF could also benefit from the turmoil.
By favoring local banks that understand local business and avoid financial "exoticism" which is risk-taking.
By replacing heavy paper-based administration, which is expensive for banks and companies, with blockchain or ad hoc IT systems that would make forgery more difficult.