Global regulations are complicating efforts to bring Asia’s frontier economies into the global financial markets, putting pressure on multilaterals to bridge the gap.
Heavy fines for breaches of money laundering regulations are making global banks reluctant to venture into Asia’s frontier markets, even through the traditionally low-risk area of trade finance.
That “de-risking” phenomenon is contributing to a global trade finance gap that the ADB estimated at US$1.4trn in its most recent survey, with almost half of the shortfall in developing Asia.
The bank’s October 2015 annual survey, based on responses from 253 banks in 86 countries and covering transactions in 2014, found that 45% of lenders had terminated banking relationships because of compliance requirements. In over 25% of those cases, banks reported they had no suspicion or evidence of non-compliance – a sign that compliance is crimping legitimate business transactions.
“It’s a challenge for the industry. The big international banks look at AML fines when they measure the risk of taking on new partners in countries such as Myanmar. It’s one of the reasons why they are pulling out.”
Almost 80% of banks cited anti-money laundering and know-your-customer requirements as an impediment to trade financing, and 93% said they expected compliance measures to increase.
“It’s a challenge for the industry,” said Steve Beck, head of the ADB’s trade finance programme. “The big international banks look at AML fines when they measure the risk of taking on new partners in countries such as Myanmar. It’s one of the reasons why they are pulling out.”
Consultants at Greenwich Associates rank HSBC as the market-share leader for large corporate trade finance across Asia, ahead of Standard Chartered. HSBC reached a US$1.92bn settlement with US regulators in 2012 over charges tied to money laundering and breaches of sanctions in markets including Myanmar. The bank has since spent over US$680m and added 2,584 compliance staff, US prosecutors said in April, citing an independent monitor.
Standard Chartered paid US$667m in 2012 after breaking sanctions, including in Myanmar, and was fined another US$300m in 2014.
The ADB added the first Myanmar institution to its trade finance programme last year, welcoming Cooperative Bank, a privately owned lender with 149 branches across the country. The multilateral has yet to complete its first deal with the bank, but is already looking to bring other Myanmar institutions through its due diligence programme.
Through the trade finance programme, the ADB supports around 2,000 transactions a year by standing behind banks in the region’s frontier markets. It provides revolving credit facilities directly to banks and guarantees payments from emerging lenders to global partners, especially commercial banks. It is most active in Vietnam, Bangladesh, Pakistan and Sri Lanka.
Last year’s support declined from US$3.8bn in 2014 to around US$2.5bn when measured by the dollar value at risk. That, however, was a result of lower commodity prices rather than a reduction in the bank’s activity or lower demand for its services.
“We think there is a gap and there is a clear impact on jobs and trade volumes,” said Beck, noting that the number of transactions the ADB supported had remained relatively constant.
Beck expects a similar outcome in 2016, given that the outlook for commodities remains depressed.
“Trade is slowing, and it’s a really tough environment,” he said.
The ADB added two more partner banks in Vietnam in 2015 and has increased its presence in Bangladesh with three new partner institutions joining in March 2016. Similar agreements in the Pacific region are expected shortly.
Capital pressures
It is also set to introduce a new product to support global financial institutions struggling with their own regulatory capital requirements.
The funded risk participation agreement is designed to qualify as a “true sale” distribution for global banks, allowing big international partners to continue to support trade without setting aside capital.
Beck sees “significant demand” for the new product.
“We want to work with international banks to help them provide liquidity,” he said. “Capital rules are getting tighter and tighter, and that means resources go to the banks’ biggest clients and their biggest markets. There is a danger that will squeeze out our developing member countries.”
Beck is also looking to step up the ADB’s support for medium-term contracts, such as capital equipment purchases that require lead times of over a year. The average tenor in the ADB’s trade finance portfolio in 2015 was about 135 days.
The ADB also seeks to play an advisory role in helping identify gaps in available financing. It funded the International Chamber of Commerce’s first annual Trade Finance Register in 2009, which helped demonstrate to Basel banking regulators that trade finance carries an extremely low risk of default, with historical default rates of 0.02%–0.05%.
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