Emerging market banks fill commodity funding gap

BRUSSELS Wed Nov 30, 2011 2:01pm EST

BRUSSELS (Reuters) - A lack of liquidity has dented European banks' ability to fund commodity finance operations, and emerging market lenders have moved in to fill the gap, Bruce Tozer of Credit Agricole Corporate and Investment Bank said on Wednesday.

A reduction in interbank lending and new European Union capital requirement rules for banks from 2013, known as Basel III, were partly to blame for the lack of commodity trade finance in Europe, Tozer said.

"But we are seeing Asian banks, emerging market banks coming in to fill that gap, but it means the price of cost of borrowing will go up for commodity finance," he told Reuters on the sidelines of the World Agricultural Forum in Brussels.

Bankers said U.S. lenders have been rapidly expanding their commodities trade operations, in response to the retreat of dominant French banks from the sector.

But despite their current liquidity problems, Tozer said he expected European banks to remain key players in commodity financing, albeit in partnership with new lenders coming into the sector.

"The banks who have traditionally been in commodity finance are likely to remain there, because of the knowledge and skills and relationships they've got," Tozer, the investment bank's head of EMEA sales for softs and agricultural products, said.

"But we are seeing new participants join syndicates to share the risk, and that's a good thing."

Commodity finance typically provides short-term funding to traders, for example, to cover the cost of import and export operations.

Tozer said he expected concern over the global economic situation to continue weighing on grain prices, despite tight supplies in many sectors.

"The shadow hanging over all of these markets is the macroeconomic situation," he said.

"The longer it takes for there to be a resolution on euro zone debt restructuring, the longer it takes for Americans to sort out their debt ceiling and deficit reduction, the more nervous the market is about demand destruction."

(Editing by Keiron Henderson)

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