March 27, 2008

The global credit crisis has emphasized the importance of trade finance. What new demands will corporates place on their banks in the current uncertain economic environment, and how can banks pursue growth opportunities in global trade finance in, for example, emerging markets? What technology investments must banks make to meet these new demands and capitalize on these opportunities?

Michael McDonough, The Bank of New York Mellon Banks must ensure that all of their processes and operations are correctly and appropriately equipped to manage the scrutiny associated with Basel II and generally stricter compliance and regulatory requirements. Banks with centralized operations and banks with all of their operations on a single platform will have the distinct advantage here because there is lower operational risk generally associated with these structures. As a result, there should also be a lower risk of failing to apply these new, stricter standards to all processes and operational locations.

These will include the ability of the particular bank to expand product offerings intelligently and in line with its particular business model, the ability to provide up-to-the-minute technological solutions to clients and, most important, the wherewithal to do all of these things profitably. These objectives are difficult to manage in an environment where demands for investment are high and returns on trade businesses are low. Many banks are investing significant amounts of capital trying to build solutions, which is extremely difficult to do profitably in the current market.

Success in emerging markets assumes a bank has the capability to work through increased regulatory scrutiny and offer a complete product offering to clients that is within the confines of that bank's credit tolerances. Clearly, in emerging markets there's often a tendency on the part of some banks to expand credit and/or go down-market as a means of growing revenues and market share. However, the earnings potential of any emerging market's growth strategy based on expansion of credit has to be measured against the regulatory scrutiny associated with this and the risks and probability of loss associated with this kind of growth.