You’ve had an extensive career in commodity finance. Could you talk me through it?
After graduating from university in 1997, I enrolled in ABN AMRO’s Management Training program and, after three or four years, joined their commodity finance division. I have always found commodities fascinating. Commodities have a tangible element that banking per se doesn’t have.
I started with inventory finance in the early 2000s with commodity repos. It was a small group initially. We did the simple stuff on LME metals, but then we dabbled around a bit in coffee, orange juice, and cocoa. It was a learning process, but it quickly grew.
The commodity world is incredible. It’s the people, the business, and the mindset. But for me, it was about understanding how commodities are traded. You must be curious and willing to go down a rabbit hole or two—to keep digging and trying to figure things out. There’s always something to learn, and it’s always intriguing. There’s never a dull moment.
I moved to AMN AMRO London in 2005, working more on the futures and derivatives. ABN AMRO sold the business to UBS in 2006, and I left after six months to join Standard Chartered Bank in New York. I worked in New York for nearly eighteen years with Standard Chartered and Rabobank before returning to ABN AMRO.
I met my wife in New York. She’s a coffee trader. She recently took a senior position with Starbucks in Lausanne, which is why we moved to Switzerland.
When I interviewed Karel Valken from Rabobank for my book The New Merchants of Grain, he said that Rabobank only finances the ABCD+ traders as the due diligence workload is not worth the time for smaller companies. Is it still the case?
When I started at Rabobank, for example, you had to have a minimum equity of $10 million to be a wholesale commodity finance client. That’s probably increased to over $100 million, with annual revenues of a billion. Capital is getting more expensive, so banks are looking for better returns. You put the same amount of due diligence and credit work into a $10 million or a billion-dollar deal.
Here in Switzerland, the smaller cantonal banks service the smaller and medium-sized clients, but their financing comes at a price. They’re more expensive. This lack of liquidity puts the smaller and medium-sized traders at a funding disadvantage.
Banks finance the smaller commodity traders contract by contract (transactional finance), which is operationally intensive. The ABCD+s are essentially corporate borrowers with revolving credit facilities. You lend against the balance sheet and the profitability.
Banks come in and of commodity trade finance. Do they misread the risk and then blow up? Is fraud a factor?
There have been numerous exits in the past few years. Most notable would have been BNP and ABN AMRO. Banks have become less keen on commodity trade finance in recent years. It is primarily driven by lower returns, higher capital requirements (partly caused by fraud losses), and increased regulation such as Basel, Dodd-Frank Act or MiFID. The combination of these factors makes commodity trade finance less attractive to employ capital compared to other sectors.
Numerous frauds have occurred in commodity trade finance recently. Some made the news, and others disappeared. Fraud undermines the banking sector’s confidence in commodity trading and changes its risk management culture. People prefer to put their money in an industry like FMCG, where they get paid good margins with little trouble.
I don’t think anybody starts a trading company and says, I’m going to defraud a bank. More often, something goes wrong, and rather than confessing to it and breaching their covenants, companies might say, ‘We’ll lie about it and hope we trade out of it.’
Even if it starts innocently, the fallouts are severe. The knock-on effects include additional scrutiny, more audits, and less access to credit insurance. Everything becomes more expensive and more complex. The whole process takes longer.
What advice would you give a young banker to watch out for fraud?
Be aware of herd mentality. Don’t go along with something just because the other banks do.
Don’t always rely on the financial reporting.
It’s part risk management and part plain old greed. You need to meet a budget, and this client pays more. Nobody wants to walk away from a client who pays a good margin. Still, the moment the music stops, everything falls apart.
One red flag would be if a client fully utilises their credit lines. The rule is, “If it’s too good to be true, then it’s not true. If your client is willing to pay double or triple the margin than other comparable clients do, then that’s not right.
Meet your clients at their offices or industrial premises. It’s a red flag if you always meet clients in a restaurant.
I once had a processor client, and we were financing stocks in a warehouse. I went to visit the warehouse for a due diligence check. The place was a mess. The floors were dirty, and the pallets were badly stacked and falling over. The office was filthy, covered in dust.
I thought, what’s the administration like if that is how they deal with their physical commodities? A year later, multiple containers went missing. We should have pulled our financing, but we didn’t. I learned to look at the surroundings when I do due diligence. Are the buildings maintained? Is everything as you would want it to be?
Is reputation risk a factor for the banks?
Reputational risk is a factor for sure. In my opinion, there are two elements to reputational risk. The first is the incidental reputational risk caused by, for example, consumer sentiment or social issues. It could be related to financing oil production, intensive farming, environmental damage like deforestation, or social issues like child or slave labour, etc. As a result, the bank could be subject to environmentalists’ protests and boycotts. It is a moral corporate citizen question that not only applies to commodity banking. And it also changes. Palm oil is a good example. It used to be a wonder crop and the renewable biofuel of the future. It was the best thing ever, but now it’s frowned upon because of deforestation.
The second element is more severe and related to breaches of regulations such as KYC compliance, money laundering, etc., resulting in significant fines and penalties. The reputational fallout can be enormous. It’s not always quantifiable beyond the fines and penalties. Are you going to lose clients over this? How much revenue is associated with the loss of these clients?
In any case, you’d rather not be in the news. There is a saying that there’s no such thing as bad publicity, but I don’t think that is true for banks. You want to avoid those headlines.
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