Global Cities Initiative: The

JP Morgan Global Trade Finance

Protracted global economic uncertainty and ongoing regulatory change make this a challenging time for financial institutions engaged in trade finance. In addition to these external headwinds, banks face an uphill task maintaining profitability amidst a volatile operating environment and rising operating costs. In spite of this, growth opportunities exist.

Q: The past five years has been a period of significant change for global trade and trade finance. What are the key changes and how are they impacting the industry?

Although the fragile global economic environment continues to impact banks and their trade finance activities, regulation is probably the single biggest driver of change.

Trade loans – being short-term and self-liquidating in nature – were traditionally seen as low credit risk instruments. However, Basel III does not reflect this view and will require banks to allocate more capital to support trade transactions. Banks also have to intensify their Know Your Customer (KYC) and Anti-Money Laundering (AML) screening processes to cover risks in this new landscape. On the whole, these regulatory requirements are driving up capital related costs, which could result in a drop in liquidity in the market and higher pricing for clients, as well as increasing the cost and complexity of day-to-day operations, which may cause some market participants to rethink their commitment to certain geographies, or to the business as a whole.

Another key area of change is the rise of South-South trade, which according to a report by the United Nations exceeded growth in North-South trade for the first time in 2008. By 2010, 23% of trade flows were conducted between 'South-South economies' compared to 13% 10 years ago.

Corresponding to this shift is an escalating number of banks aiming to expand their market reach to provide support for their corporate clients in these new markets - either by partnering with a complimentary player in the market or by building their own networks.

Q: What are the emerging trends in trade finance?

Technology is transforming the way trade banking is being conducted. Traditionally a paper-intensive process, trade finance is evolving with the emergence of technology-based solutions that enable higher levels of process automation and standardization across the entire banking network.

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