Since the 2008 crisis, the financial landscape has undergone significant change. While restricted lending from global banksostensibly spells bad news for corporates, in the long term, it has nurtured an environment that is actually more favourable to borrowers than ever before, says Will Nagle, CEO of leading specialist financier, Falcon Group
Few would look back fondly on the financial crisis and the shockwaves it sent through the global economy. Major companies went bankrupt, banks were forced to retreat and GDP shrunk on a global scale. Yet there may be some positives to take. For one, in the long term the crash looks to have paved the way for a better and more secure financial landscape.
As has been well-documented, the crisis highlighted a number of issues with regard to the structure and lending practices of the banking system – issues that have since been counteracted by a wave of banking regulation. Unfortunately, one side effect of these new measures is that banks now have a more limited lending capacity – a potential threat to corporations in search of funding.
However, innovative firms are now stepping in to meet the surplus demand – creating a diversity and a range of options that actually puts corporates in a better position than ever before when it comes to securing funds.
Prior to the crisis, many global banks were concentrating their lending on high-risk investments, in many cases lacking the necessary capitalisation to secure themselves against the risks. In the wake of the crash, regulatory bodies – such as the Basel Committee – decided to intervene, imposing stricter demands on capital adequacy.As a result, global banks are now required to hold a larger proportion of their funds in reserve, forcing them to prioritise their lending – often favouring long-held clients and multi-national corporations.
These stricter capital regulations have put trade finance under threat. Although a low-risk investment, trade finance has been heavily penalised by Basel III, to the point where it is seen as unprofitable by some banks. As a result, companies looking to fund trades may find themselves low down on priority lists.
This prioritisation also poses a challenge to corporates of all sizes – who may be overlooked by selective bank lending. SMEs, of course, are particularly at risk – a fact that is particularly troubling when considered with the International Finance Corporation’s estimate that SMEs account for 90 percent of the world’s businesses. Indeed, SMEs are also found at the heart of many an international supply chain, making them vital within the wider financial system.
The problem can be seen in Europe, for example, where over-reliance on bank funding is holding back growth for small businesses. This was the consensus among respondents to a recent survey from the Association for Financial Markets in Europe, who identified five chief areas of concern for European SMEs – number one on the list was a ‘lack of adequate funding avenues’.
Filling the gap
These considerations are seeing many corporates turn away from global banks towards other providers. Regional banks are well-placed to cater for some of this new demand, offering the advantage of greater local knowledge. However, they often do not have the flexibility or resources to meet the highly-specific requirements held by some corporates.
And this is why firms are increasingly looking to another source: speciality finance. Crucially, specialist financiers are not banks and are therefore unaffected by capital regulations. This makes them uniquely flexible as a funding source –able to step in and supply finance to corporates that global and regional banks cannot fund.
What’s more, in the case of larger specialist financiers, such as Falcon Group, this regulatory flexibility is augmented by a combination of local knowledge and global reach.This flexibility is what makes specialist financiers such an attractive proposition to corporates – enabling them to tailor their solutions precisely to the needs of their clients.
Of course, these tailored solutions are also the result of the close relationships specialist financiers maintain with their clients – ensuring they truly understand each company, and every need.Furthermore, specialist financiers can combine this strong communication and sophistication with enviable speed. All these capabilities put them in a position to match their clients’ needs in a way that banks simply cannot.
Indeed, these advantages have also turned heads among mid-caps and large corporations – including firms that do have access to global-bank funding. These larger firms have specific and complex needs of their own, and are increasingly seeing imaginative and sophisticated funding as a way to meet them.
Collaboration is one answer
Nevertheless, the landscape that is taking shape is not one of competition; it is one of collaboration. Global and regional banks are working in tandem with specialist financiers – offering composite solutions that cover the needs of all sorts of borrowers. The diverse range of options this creates is of immense benefit to corporates – who can now match their funding to their needs more closely than ever before.
So the world of financing has changed for the better. Global banks no longer dominate the market in the way they used to – making way for regional banks and specialist financiers to offer their own funding solutions. And of course, the jewel in the crown of this new system is the syndicated solution. Working in partnership, banks and specialist financiers are able to offer corporates exactly what they need – in exactly the way they need it. A new era has dawned, and it looks to be of great advantage to borrowers of all descriptions.