FT: Commodity trade suffers as French curb credit

By Javier Blas - 20th October 2011

The European banking crisis is spilling over into commodities trading with French banks, the main financiers of trading houses, reining in their lending.

BNP Paribas and a handful of other European banks, including Société Générale and Crédit Agricole, provide most of the credit lines that underpin the business of the publicity shy Swiss-based traders that dominate commodities markets.

Trade finance is a huge business, with lending hitting $114bn in the first nine months, down 6 per cent year-on-year, according to Dealogic.

Industry executives said that as the banks have to boost their capital buffers, credit to the trading industry is becoming scarcer and costlier, particularly in US dollars, the currency of the global commodity markets.

Julien Garran, commodities analyst at UBS in London, said it was “increasingly likely that the French banks will wind down their commodities trade financing business”. In a report, he quoted an industry executive warning that if BNP were to quit the business, “it would most likely cause a panic”.
BNP’s Geneva branch alone accounts for up to a quarter of the sector’s credit, according to industry estimates. The bank said commodity trade finance activities “will be part” of its “global deleveraging effort”, but it “had no intention to exit the business”.

In 2008, a sharp reduction in credit to the trading industry exacerbated the financial crisis by almost freezing global trade flows, pushing commodities prices sharply lower. Executives said the industry was in better shape now as many traders had diversified sources of funding.
Industry executives and bankers said the top traders, including Glencore, Vitol and Cargill, were unlikely to be affected by the credit crunch but small and medium-sized trading houses were already suffering.

The drive by French banks to reduce the size of their balance sheets is exacerbating the adverse impact on commodities trade finance of the new Basel III capital rules. The new regulation, which phases in over the next seven years, makes the issuance of letters of credit far more onerous than in the past. While banks needed to hold capital equal to just 20 per cent of the value of letters of credit under the old Basel II rules, the new agreement raises the bar to 100 per cent, greatly increasing the cost of lending.

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