EMERGING MARKETS

Deutsche Bank Tests the Trade Winds

  • Why it matters

    Why it matters

    Tighter regulations have prompted banks to sever many international banking contacts, causing a severe shortage of global trade finance for small and medium-sized businesses.

  • Facts

    Facts

    • Small and medium-sized firms face a $1.6 trillion shortage of trade financing, according to the Asia Development Bank.
    • Banks have been pulling out of trade finance due to higher costs caused by tighter regulations to curb money laundering and terrorist financing.
    • Deutsche Bank plans to increase its market share in trade finance, especially with emerging markets.
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    Audio

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Cargo ship leaving the port or bay. Despite US embargo, Cuba…
Compliance with costly regulations has steered trade finance into treacherous waters. Source: Getty Images

You’d be forgiven for thinking Deutsche Bank, in the throes of a major restructuring, would lose its taste for adventure. Yet Germany’s biggest bank is expanding its financing of trade between industrial nations and emerging economies – an increasingly challenging sector. What’s more, Deutsche Bank is beefing up this business just as droves of other banks are getting out.

A German engineering firm selling machines to build roads in Brazil, sugar exporters and importers and dozens of firms making parts for Apple’s iPhones depend on banks for loans, letters of credit and other documents to support their trade. European banks once used their heritage to dominate trade financing, but many have retrenched, hurt by the regional debt crisis and struggling to conform to tougher global rules. British bank RBS, for example, has pulled out of 25 of the 38 countries it operated in, closing its trade finance department in the process.

This broad-based retreat has opened the door to rival banks eager to grab a slice of the market, according to studies by the World Bank and the Financial Stability Board of G20 countries.

“Correspondent banking is like the blood that delivers nutrients to different parts of the body.”

Christine Lagarde, IMF managing director

On the face of it, the potential is enormous. The Asia Development Bank estimates there is a $1.6-trillion gap in trade finance for small and medium-sized businesses worldwide. Still on the rebound following missteps in investment banking, and a retreat from universal banking, Deutsche Bank is on a hopeful quest for new profit centers. With this in mind, the bank is expanding its financing of exports to emerging markets in Africa, Latin America, the Middle East, and Eastern Europe.

“Many of our competitors have pulled out of financing in these regions,” explained Daniel Schmand, global head of trade finance at Deutsche Bank.

No surprise that it’s becoming increasingly difficult, Mr. Schmand said, for smaller companies to obtain loans to fund their trading operations. Enter Deutsche Bank, which is betting that fresh manpower and savvy fintechs will leapfrog the thinning ranks of competitors. The institution plans to recruit 20 to 30 staff to its trade financing department and boost investment in its IT systems.

17 p30 Global Decline-01

That news should please Christine Lagarde, head of the International Monetary Fund. “Correspondent banking is like the blood that delivers nutrients to different parts of the body,” she said in a recent speech. There is a real concern, Ms. Largarde added, that this “financial lifeline” is at risk for quite a few IMF member countries.

Small companies in emerging economies have been the hardest hit. For instance, Lithuania, which conducts most of its trade with Russia and the European Union, has lost one-fifth of its correspondent banking contacts in the last few years. But Germany’s export-led economy is also being affected. “German medium-sized businesses are hit indirectly because it means their customers in these countries can’t invest as much, and are therefore buying fewer products from Germany,” said Mr. Schmand.

So why have banks been severing these key global links? The answer is costly regulation. In recent years, financial institutions have been subjected to ever tighter rules aimed at curbing money laundering, terrorist financing, and suspicious payments.

“One has to take a look at what makes economic sense”

Alexander Mutter, head of trade finance at HSBC Germany

Banks face billions of euros in fines if they break these rules. That’s why they’ve been checking their foreign contact banks, and of those banks’ clients, more closely than ever. That process costs a lot of money, so banks have become very selective in their choice of partner financial institutions abroad. And many banks can simply no longer afford to maintain small correspondent accounts.

“One has to take a look at what makes economic sense,” said Alexander Mutter, head of trade finance at HSBC Germany.

Mr. Schmand said Deutsche Bank, which has 1,500 to 2,000 correspondent banking partners worldwide, has already thinned out its own network, without withdrawing completely from any countries.

Commerzbank, Germany’s second-largest bank, once had over 5,000 correspondent banks but has now slashed that network by half. “In some countries there are few banks left with whom we want to do business, in keeping with our compliance standards,” said Bernd Laber, head of trade finance at Commerzbank.

Commerzbank still processes around 30 percent of German foreign trade transactions, Mr. Laber said. That’s more than Deutsche Bank, which says it has a “clear double-digit market share” and wants to increase that percentage in the next three years. To do so, Deutsche does not plan to re-expand its network of correspondent banks, but to cooperate with well-placed organizations such as the IMF, the World Bank or KfW, the German state-owned development bank.

Commerzbank processes around 30 percent of Germany's foreign trade transactions.

Commerzbank also taps the financing programs of development banks, which are more reliable than banks based in countries with high levels of corruption. “This model isn’t a global solution,” Mr. Schmand told Handelsblatt. Regional development banks, he added, don’t have the capacity to close the massive financing gap in foreign trade.

Heavy industry, including Germany’s fabled engineering sector, is coming to grips with the new reality. “With banks withdrawing from some countries, industrial firms have been forced to establish more banking relationships of their own, to export to the rest of the world legally,” said Klaus Friedrich, foreign trade expert at German engineering federation VDMA. But that, in turn, raises administrative costs, as banks subject clients to increasingly tight security checks (which Mr. Friedrich describes as “excessive”).

HSBC, for one, is demanding more information from clients than it used to, Mr. Mutter confirmed. But it’s considered money well spent, as control mechanisms protect both the bank and its clients from money laundering and breaches in trade sanctions.

Yasmin Osman and Andreas Kröner reported this story for Handelsblatt. David Crossland and Jeremy Gray adapted this story for Handelsblatt Global. To contact the authors: osman@handelsblatt.coma.kroener@vhb.de

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