Many banks are shedding jobs, restructuring or reducing their commodities business to cut risk.
Banks have suffered losses to the tune of $9 billion from the $18 trillion commerce finance enterprise
Commodity traders have been feeling the heat in the recent past on account of volatility in commodity prices compounded by reduced trade due to Covid-19
This decision by banks can be attributed to a certain set of micro and macro factors. “Key micro factors stems from the recent sizeable defaults by commodity traders in hubs such as Singapore, Dubai, and Switzerland, leading to a general collapse in confidence,
, has confessed to hiding about $800 million in losse
Commodity trade finance was considered as among the safest businesses for banks at one point in time
Many banks with no experience in the commodity finance business have entered the space lately and offered unsecured and cash-flow based medium- to long-term lending facilities
Regulatory changes mean that banks have to now charge more per transaction to clear their internal risk-adjusted return on capital employed thresholds. These changes have also tightened the high global recovery rates or low loss-given defaults being ascribed to many structured trade transactions like pre-payments, pre-export finance, thus making deals not lucrative at the current margins.
The changing environment amid the pandemic has led to a decline in global trade. Global trade is forecasted to decline between 13% and 32% in 2020, as per the U.S. Congressional Research Service depending on the depth and extent of economic downturn.