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The role of the banks
Trading is risky business. There are several types of risk classifiable into four main
categories: the delcredere risk (risk of default by the counterpart), the country risk
(political, economic, etc.), the market risk and the risk related to quality of the service.
These four risk categories can be partly hedged against by means of financial instruments such as letters of credit, bank guarantees or even options or futures.
The principal role of the banks therefore is to buy risks and facilitate trade operations. They also provide these companies with credit (often by means of letters of credit). The quality of the relationship between trading companies and their banks is therefore a key factor in the development of these companies.
However, the banks have not confined themselves to playing a passive role. They have themselves developed and fomented trading companies by providing them with capital, in some cases even companies without real equity. This type of financing, guaranteed by the merchandise itself, was born in Geneva and subsequently developed in the rest of the world, though it is of course not the sole type of financing available.
Types of financing
For a proper understanding of trade financing in Geneva, it is necessary to discuss the two prevailing schools of financing :
The Franco-Swiss school
This category includes French, Swiss and Benelux banks. It is characterized by what is known as secured financing. The merchandise is used to guarantee the banks providing this type of financing. Risk evaluation is based less on a detailed analysis of the balance sheet of the company being financed than on an evaluation of the transaction in hand. This type of financing therefore calls for greater knowledge of markets and products on the part of the credit manager, but the risks are delimited by possession of documents such as bills of lading, which are equivalent to a pledge of the financed merchandise.
The Anglo-Saxon school
This is based on loans. The company balance sheet is analyzed and on that basis an estimate made of the amount of cash that can be accorded. The degree of control over this type of funding is rather limited. A much greater risk is taken, though the costs and human resource requirements are lower. This type of financing is not widely practiced in Geneva, except in respect of companies with a sizeable borrowing base.
Today, in addition to these two categories, other more sophisticated types financing are available. For a full understanding of the new types of financing, it is necessary to look at the way international commodity trading has evolved.
Evolution
The nature of international trading has evolved considerably over the years. To create added value today, one must either find new markets or extend one's activities to cover the entire production process. The following example will help elucidate this:
A smelter lacks the funds to buy iron ore but has the know-how for processing this raw material. In such a situation, the trader undertakes to supply the factory with iron ore and to buy the processed product. To secure his margins therefore, the trader must engage in what is called tolling, that is, he must participate in the various stages of production. He will procure from his bank not only the funds to purchase the raw material but also to buy the processed product. This means that the bank itself must also provide a wider range of services.
This trend in international trading has led the banks to engage in what is known as prefinancing (or post-financing). These categories of financing are used mainly in countries without an adequate banking system capable of furnishing the various industries with credit. The companies lack access to the capital they need to support or develop their activities. With the help of banks, trading companies (or the banks alone) undertake to fill this gap (it is often said that Geneva banks are being largely instrumental in the relaunching of industrial activities in Russia). Once a country has its own means of funding, this type of operation is obviously no longer justified. The trading businesses are therefore becoming increasingly sophisticated and require greater skills on the part of the trader or banker.
Structured trade finance can be even more elaborate. For instance, it could entail
bankrolling the construction of an oil platform or a coal mine, with repayment being
based on the export sale of the product. Such transactions involve colossal sums. Banks, therefore, generally share the risks among themselves by forming syndicates. The skills required for structured trade financing therefore differ appreciably from those called for by secured financing.
Banking and Expertise
The banking professions associated with international trade financing are not taught in the professional schools or universities. They are therefore learned "on the job". Experience remains the key to any special know-how that may exist in this sector. With its long tradition in the field of international trade financing, Geneva obviously enjoys a considerable comparative advantage over other business centers, especially in secured financing. The such banks have well-seasoned teams, whether in the domain of letters of credit (9 years' experience on average) or in credit management (also 9 years).
In effect, the focus of PIA Bank S.A.'s risk management is the total project concept handled through the fiduciary accounts. The high levels of assets and guarantees of delivery link our Anglo-Saxon scrutiny of audit details to the Franco-Swiss tradition in a new hybrid bank responding to the emerging situation which we have seen in Russia and other countries. Our dedication to asset control and guarantee which evolved from our development of the marketing of Chronotechnics Holding S.A.'s assets is now applied to the new scenarios where our individual attention to the legaloty of diverse market issues and autonomy of each contract assures that PIA Bank S.A. is prepared to offer its clients an ever broader spectrum of products beyond the traditional banking spectrum with ever increasing autonomy and expertise in asset management. Each of our principal directors has at least twenty years of expertise in their banking speciality.
While banking is based upon the management, purchase and resale of risk from the trading sector, certain key changes dictate a need for a new kind of bank.
Two major factors contribute to this systemic change. Both factors have been noted in OECD directives. The first is operationally and optionally selective and the second is systemic requiring a longer explanation of the relationship between audit, banking, risk and trade:
1) This memo reports on a political position and its costs:
Newsletters
Did you know...?
..that if all post-Uruguay Round trade barriers on services trade were removed, the world's economy would be better off to the tune of US$130 billion.
Source: GATS: The Case for Open Services Markets (OECD, April 2002). ISBN: 92-64-19725-7.
The decision was to move from the erudite and technical statistics generated by France, Geneva, Luxembourg and U.K. to politically motivated strategies. It is PIA Bank's position that these uninformed and unprofessional political interventions are responsible for the shrinking of the global economy more than any single national policy:
Now on the WTO website:
TRADE TO PICK UP SLIGHTLY IN 2002 AFTER SHARP DROP IN 2001
World exports dipped 1% in volume in 2001 and contracted 4% in value to US$
6 trillion, according to the WTO's latest report on international trade,
released on 2 May 2002. For this year, the WTO's economists predict a
moderate recovery of around 1%.
> Press release
The hybrid situation requires a hybrid bank with a global reach to which PIA Bank is responding. Thus, there are two banking pressures creating our market share and a gap in the banking system: the political situation driven by non-banking concerns necessitates a revision of audit skills which is going on internationally in the form of a revision of corporate governance to which PIA Bank specifically responds with a specific training program for our personnel. The technical and systemic situation is a question of diminishing capital investment and the creation of capital through a strategic monetary policy and a modified arbitrage pricing policy.
The first scenario can be recounted and traced through largely crisis oriented reports about the global banking and debt situation and its relationhip to monetarism and global politics. While PIA Bank cannot help you if you participate in this system and strictly aschews all forms of political intervention ( we do not provide audits for marketing purpose nor for governments nor for any public institution such as a media network: our only asset appraisal services are oriented to securitization or arbitrage pricing, whose outcomes we do not allow to be made public under any form). However, if you wish to enter into the emerging global monetary system, we can securitize your existing assets to make them correct and suitable as well as more profitable and secure in any global forum. This scenario constitutes a monetary policy crisis management which we will detail in a series of reports describing the gap in the securities system which we will be targeting.
The second scenario is the positive response to the monetary crisis which we call risk management. This section is, largely, made up of reports about harmonization policies, innovations in securitization such as fiduciary accounts and Luxembourg type "trust" accounts and liquidity in central banks. These issues will be dealt with under "risk management" which we understand to be a positive monetary policy response through securitization to technically controlable risks.
The crisis which became evident with the failure of Argentina is only in appearance a recent crisis. In fact, this was not only a situation which has been monitored for almost 50 years, but a crisis related to the Japanese banking crisis which has been monitored and deplored for at least 10 years before the collapse of the Japanese economy. Even, in the most promising economies like China the same type of temporary failure such as the closing of Shanghai stock markets in 2001 can lead to domino effects. In effect, the domino effect has had an impact in North America as a variety of failures of trust companies reveals in the years from 1998 to 2001.
The policy which we call crisis management is related to this "laisser faire" policy which, currently, dominates global monetary policy, although the emergence of the Euro has forced a re-evaluation and alignment of the currency dependency chain upon which IMF bases its' assessments. The key to the problem is the commonly held belief that debt is evenly distributed in the emerging nations and that all of these economies are similar. In fact, this is not the case as I shall show with a report from the OECD in the "Did you know that" series:
"Of the US$2,294 billion owed by developing and transition countries at the end of 2000, half was owed by just nine countries: Brazil (the biggest debtor), Argentina, Mexico, China, Korea, Indonesia, Russia, Turkey and India. Heavily Indebted Poor Countries were responsible for just 7% of total debt."
Sources: "External Debt Statistics, OECD, Decemeber 2001" (ISBN: 92-64-19692-7). Full database available on CD-Rom ("International Development Statistics," OECD 2001) and online ("SourceOECD International Development Statistics").
This disturbing statistic and repeated warnings from the Rothschild Financial Group, Zurich, fell on deaf ears as the global community, the UN, and the World Bank focused on the heavily indebted poor countries. This situation reflects the advantage of the professionalism of commercial banks in such monetary policies where simple non political solutions can be rapidly implemented with a reduced cost. In effect, the outsourcing of the problem to the commercial banks and asset managers would prevent many more crises? How is the crisis going to spread? With a lack of solid facts, an atmosphere of economic contagion and, consequently, quarantine has been applied to all investments in the emerging economy from Albania to Zambia causing further crises. Even the wealthy countries are impacted by the defaulting loans which tighten money and reduce employment opportunities in these countries. The BBC source article for this discussion goes on to pinpoint the problem:
"The most imortant thing to watch here--and what has really aroused investors' ore--is the currency board, under which the Argentine peso is pegged immovably to the US dollar.
The peso peg, in place since 1991, when it was highly fashionable among eocnomists, is now seen as the root of Argentina's troubles, restricting freedom of movement, overvaluing the peso, and substituting governmental rigous for free-market flexibility."
Source: "Argentine crisis ripples spread." http://news.bbc.co.uk/hi/english/business/newsid_1719000/1719246.stm
Obviously, capital is lost in such defaults leading to other consequences around the world. One of the warning crises was the series of bankruptcies in the United States which were all related to aggressive accounting practices and lax audit practices. The failures from K-Mart to Enron all made a warning statement about a crisis in management practices where neither the Anglo-Saxon nor Franco-Swiss assessment methods were being implemented. In fact, the delivery receipts which would be the basis of the Anglo-Saxon financing method were being shredded because they were falsely produced. Simlarly, Franco-Swiss knowledge of the market was not applicable because subsidiaries were created with the sole intention of transferring a debt load away from the parent company. We, at PIA Bank, believe that we and the adherents of the Franco-Swiss financing system would have stopped these operations at a much earlier date because the required documents for banking would have been missing. These are very real checks and balances which the EU has inherited from the Franco-Swiss system. The ultimate outcome is that, in effect, the U.S. surplus is gone and that, moreover, the lost capital is now showing up in their budget as a new deficit.
Source: "US budget surplus gone" http://news.bbc.co.uk/hi/english/business/newsid_1775000/1775698.stm
PIA Bank recognizes these patterns which are the same ones, afflicting every nation in the world and offers the possibility of stemming your losses by converting your assets into properly valued asset-based securities. The bottom line of the targetted audit and monetary policies is the reduction of investment capital and implementation of destructive monetary policies. I will cite two examples which will further understrike the importance of PIA Bank's dedication to details and oversight in global markets. The reduction of global investment capital by half impacted the global economy in an unexpected way which has greatly delayed the anticipated recovery:
"The sharpest falls were seen in developed economies, which saw their total foreign investment inflows more than halve last year to and estimated US$500bn, the United Nations Conference on Trade and Development (Unctad) said.
The developing world, by contrast, suffered only a modest drop, US$240bn in 2000 to US$215bn last year."
Source: "Global Investment almost halves" http://news.bbc.co.uk/hi/english/business/newsid_1774000/1774956.stm
The side effect of the collapsing capital has a negative influence on everyone as equalization payments fail to maintain exchange rates which sustain growth and trade. While the greater problem is expressed as tariffs on steel and lumber in a growing trade war, the daily problem is felt by the small business man as well as this article insists:
" Bolivians are having a hard time.
The country has been in economic crisis for two years with zero growth, unemployment rising and firms closing their doors on a weekly basis.
Now, as the national currency is devalued to maintain competiveness with Argentina, small businesses which were already struggling are feeling the noose tighten.
'Every month we get less dollars for our bolivianos and every month the business is less profitable,' explained Javier Sonco, owner of a small shop in the city of La Paz."
Source: "Bolivian firms falter in Argentina's aftermath" http://news.bbc.co.uk/hi/english/business/newsid_1895000/1895440.stm
PIA Bank's solution to the small business problem is to use the Franco-Swiss strategy based upon expertise in the market and look to the strength and growth in the U.K. as a model for the weaker Latin American sector. We will implement the same model in all emerging and developped economies. The reason that the U.K. finds such favour with the IMF and the World Trade Organization is based on the robust infrastructure supported by the small businesses of the nation. A BBC article on the success of the small business or micro-economic community in the U.K. serves as a model for us in evaluating bonds issued to cities and national groups in support of the small business community. While we do not deal directly with small businesses, we do create the most equitable and secure bonds for the agencies which do deal with them and insist upon certains standards as a guarantee of these bonds. The BBC article lays out a clear model for success in the sector based upon positive and negative aspects in a comparative study of the micro-economy. Firstly, British companies in the sector had the highest pre-tax profit in the nine countries surveyed and, thus, the greater liquidity which was a second comparable leading to their being the least likely "to go bust" as was the case in other European countries. Other factors are quality control and sick leave. The British companies were less likely to send out defective goods and their employees took fewer sick days. An important factor in evaluating large bond issues is the management of information and management itself. The British Minister Nigel Griffiths reflects a correct attitude towards this process:
"I want to give our millions of small businesses the competitive advantage in Europe.
This report gives them a unique opportunity to do that by comparing themselves to their international competitors."
Source:"Britain's small firms 'rule European roost' http://news.bbc.co.uk/hi/english/business/newsid_1904000/1904779.stm
We must,at this point, also note that it was France's attention to the micro-economy and an aggressive policy for exports of both products and services which allowed it to weather the economic storms better than most. This economic position is largely summarized in the conference direct by Laurent Fabius on the subject in the fall of 2001. With these features of the micro-economy, let us now examine their comparables in the macro-economy or global economy. It is, in this sector, where we find the bulk of our clientele and where our expertise respresents PIA Bank's real edge in the emerging securitization market.
The positive position which PIA Bank takes with regard to securitization and the global economy is reflected in three levels of reform of governance which constitute a return to practicality in banking and the recognition of the systemic and successful models of securitization implemented or recommended by international agencies, and central banks. We have discussed the foundations of our economic evaluations in terms of the foundations of the economic infrastructure, the micro-economy in the preceding section.
We can, conveniently, summarize our method of evaluation in the macroeconomic sector according to the two general schools of financing defined in the Swiss Banking study: the Franco-Swiss school and Anglo-Saxon school.
The Anglo-Saxon position can be summarized in several documents from the Federal Reserve Bank of Atlanta. The two major documents from the Federal Reserve Bank which we will discuss are the Latin American Research Group report, LARG Brief, and a document called "Nominal and Real Disturbances and Money Demand in the Chinese Hyperinflation" which deals with the kind of money demand which led to the closing of the Shanghai stock exchange in November and December of 2000. Both discussions reveal hidden factors involved in evaluating monetary policy. In these two scenarios, which took place at the opposite ends of the world, two faces of the same financing evaluation dynamic are represented. Both result from policies of monetarism, which extend back to the post second world war period. The Anglo-Saxon evaluation of the Argentinian default emphasizes three aspects of the financing evaluation:
1) the global impact in terms of the current financing situation i.e. an inventory of losses and their impact on the financing sector:
"The probability of negative events had been factored into the markets for some time, so the events of the past few weeks did not surprise the markets in the same way that the Mexican, Asian, and Russian crises did in the 1990s...
The biggest damage is being felt in the banking industry where the two largest Spanish banks, Santander Centro Hispano and Banco Bilbao Vizcaya, may have lost a total of $4 billion according to some industry estimates. HSBC Holding may write down as much as $1 billion from Argentine losses while FleetBoston, with $6 billion in loans to Argentina, has delayed its earnings report. Scotiabank reportedly may sell its Argentine subsidiary depending on forthcoming government measures to rescue the banking sector. Numerous other firms, such as AT&T, Telefon AB LM Ericsson in telecommunications, and French retailer Carrefour, are also expecting losses in their Latin American subsidiaries. Brazilian firms are owed $2 billion from Argentine firms, but these funds are guaranteed by the Argentine central bank."
Source: "LARG Brief: After Argentina?" http://www.fbratlanta.org/econ_rd/larg/analysis/brief_0102.htm
Keywords: earnings report, guarantee, industry estimates, write down
2) Prognosis for future financing in the sector or guidance:
"While leading global firms are taking losses in Argentina, it is no surprise that additional investments have been put on hold until the situation stabilizes. A more immediate question is whether or not the events in Argentina will discourage additional portfolio and foreign direct investment in emerging markets, in general, and Latin America, in particular. One encouraging indicator is that the FDI in Brazil picked up the fourth quarter and hit $23 billion for the year, surpassing many forecasts. Outside of Argentina, emerging markets had a strong year--the JP Morgan EMBI+index less Argentina returned 19.8 percent in dollar terms last year. Another positive signal is that on January 7, just days aftre the Argentine devaluation was announced, both Brazil and Mexico completed successful sovereign bond offerings. Peru, Panama, and Costa Rica are expected to follow suit."
Source: "LARG Brief: After Argentina?" http://www.fbratlanta.org/econ_rd/larg/analysis/brief_0102.htm
Keywords: devaluation, emerging markets, foreign direct investment, indicator, signal, sovereign bond offerings
3) Direction is a policy statement or warning about banking activities:
"Another potential form of contagion lies in the realm of policy. President Duhalde has indicated that Argentina will adopt new policies that emphasize increased state intervention in the economy and greater protectionism... In any case many observers are questioning the degree to which structural reform in the region is in danger of being halted or reversed.
On the trade side, the Duhalde administration has indicated that its highest prority is to improve relations with Brazil and revive Mercosur, which been under stress since Brazil's devaluation. The worst-case scenario would be if the two countries reject such negotiations and instead build Mercosur into a protectionist bloc. More likely, the two countries will use their joint leverage in future Free Trade Area in the Area of the Americas negotiations.
Source: "LARG Brief: After Argentina?" http://www.fbratlanta.org/econ_rd/larg/analysis/brief_0102.htm
Keywords: devaluation, policy direction, potential, protectionist bloc, signal, structural reform, worst-case scenario
The second document which we will, briefly, discuss reveals the role that heritage models play in financing and how they play a role in evaluating inflation and money demand in terms of consumption. This same model could have been used to evaluate the more recent situation in the Shanghai stock market and for devising a schedule of distribution of the securities in question, a re-securitization based upon arbitrage pricing. This system is a more important part of financial mathematics than is commonly taught under this name. The second issue is the assumption by the authors that the "welfare costs" had not been considered. Basically this is how theoretical models enter into the real financing market place:
"The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post-World War II Chinese hyperinflationary episode empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and undestimate the welfare cost of hyperinflation.
Source: "Nominal and Real Disturbances and Money Demand in the Chinese Hyperinflation" http://www.frbatlanta.org/invoke.cfm?objectid=AAECA582-428B-11D6-A3910008C772.htm
Keywords: econometric investigations, hyperinfaltion, money demand, relative price effects, welfare cost
The Franco-Swiss financing style is mainly procedural and operational and, thus, the emergence of the new economy and monetary policy takes the form of procedural changes based upon improved forms of securitization. However, in order to understand the importance of securitization in the current market, we must look back to the Federal Reserve Bank's report on the subject:
"The failure in July 2001 of Superor Bank FSB of Hinsdale, Ill. a thrift with $2.3 billion in assets cost the Federal Deposit Insurance Corp (FDIC) between $450 million and $550 million. In testimony prepared for the U.S. Senate Committee on Banking, Housing, and Urban Affairs, former FDIC Acting Director John Reich identified the reason for Superior Bank's failure primarily as "the decision of its board and management to book high levels of retained interests related to securitization." Reich continued, "Since 1988, failures of institutions with risk characteristics similar to those of Superior have cost the FDIC insurance funds more than $1 billion."
Source: "New Data Reveal Exposures, Help Regulators" Did you know? http://www.frbatlanta.org
The Franco-Swiss Bankers have set in motion a series of reforms to deal with bank liquidity and securitization so that a greater guarantee of the absolute value of capital can be more, precisely, measured during the trading day along with the liquidity position of any financial institution. As you will see in the following summary, this has resulted in an operational transformation represented by doctrinal statements like the Basel Reform. These statements have generated new forms and required new operations as guarantees of securities. The major change is necessitated by the unified currency in Europe, the Euro. The markets which share a European and North American component remain stable such as the Marché à Terme International de France (MATIF). The general specifications for this basically cash market in sovereign bonds sets the stable international standard by which such securities are assessed. (http://www.e-analytics.com/fu222.htm). The changing market where new types of securities are required are entities like the French Financial Markets Council which facilitates and regulates financial services exported to other EU countries:
Source: French Financial Markets Council http://www.cmf-france.org
and the implementation of TARGET for transborder monetary trading with the purpose of guaranteeing harmonisation of domestic RTGS systems to the optimal level for efficient conduct of the single monetary policy and for avoiding distorting competition between banks. The RTGS systems will require hamonisation in the following areas:
1) the provision of intraday liquidity
2) operating hours (market closings)
3) pricing policies
The securitization question is presented as instruments to provide intraday liquidity where Reserve requirements are discussed, the market for intraday liquidity, ovredrafts at the central bank, the definition of assets and the conditions under which their values will be taken into account, and the examination of existing securities settlement systems in terms of EMI.
Progressive steps have already been taken by other financial institutions to implement these operational changes in the EU. Among these changes of interest to PIA Bank are the Globally registered securities implemented by UBS and the Energy Tender from Barclay's bank which exploits its expertise in procurement as BarclaysB2B to simplify the now sophisticated and complex process. This Energy Tender which is a predecessor of our Energy treasury note or bond is targetted at a similar market, companies with a turnover of £100 million whose electric bill is over £1 million. The Barclays estimates the waste to the company without their service at £100,000 per year. These figures tend to define the market for such specialized securities. We set our combined deposit and fiduciary accounts at a minimum of US$20 million. For a full discussion of fiduciary or trust concept account, it is informative to visit "Les Banques Luxembourgeoises et le Trust" http:// www-domino.crpgl.lu.
Source: "Operational Practice in Domestic RTGS Systems" http://www.ecb.int/target/bt/tabt06_4.htm
The advantages in balance of payments for the globally registered securities are transparency and a universally agreed value for securities. The appearance of a major monetary unit representing a high percentage of global development, population and wealth has merely facilitated this inevitable step to a universal banking system.
