In the years following the 2008 financial crisis, regulators introduced rules to promote stability in the international financial system. While these new regulations have been largely successful in limiting the exuberant risk-taking that helped send the global economy into recession, some of these broader changes – originally introduced to prevent another credit crisis – are now negatively affecting other segments of the financial markets. In banking, new capital requirements have meant much less credit is now available to finance global trade, which has created a supply gap of roughly $1.5 trillion a year1.
As we stare down the barrel at the end of an 11-year-old expansion – due to panic in the market from the coronavirus outbreak – maintaining access to capital is even more crucial. This is because the gap in trade finance has the potential to damage the global economy just as badly as non-performing loans did in 2008, if for very different reasons. We believe that a measured rethinking of financial regulations is needed to encourage capital providers to lend more and support trade finance. At the same time, new entrants, such as credit funds and private equity, can keep money flowing towards commodity trade deals.
Our perspective is not intended as a criticism of regulators whose job is incredibly tough – a balancing act of encouraging innovation and growth, while reining in systemic risk-taking. The suffering that the financial crisis created rightly demanded robust rulemaking to drive better risk management within financial institutions. The Dodd-Frank legislation in the U.S. and the European Basel Accords cleaned up banks’ balance sheets, boosted liquidity, and, most importantly, made financiers think harder about probabilities.
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