Is Bank Funding Insufficient to Meet Demand for Supply Chain Finance?

There is an interesting question contained in the article’s title. One could go to the Fed’s website and see that current required reserves (10% of reservable deposits) are in the range of $120 billion, while excess reserves (which now pay 50 basis points) are in the range of $2 Trillion. This alone tells you that U.S. banks have plenty of available cash for lending.

There is this perpetual myth that there is some great liquidity void in this market as banks either underserved or exited due to capital requirements and pruning of their customer base. While banks have certainly deleveraged their balance sheet, there is appetite for good credit risk.

The questions is, what to invest in, given the interest rate environment and all the restrictions on asset quality. While it is true that certain types of supply chain financing (SCF) can be structured as “off-balance sheet”, there is no 100% certainty on interpretation and so many ratios have been adjusted since Basel III rollouts that banks err on the side of caution. It remains true that the highest demand for SCF is a sliding scale from smallest-to-largest companies, and the largest companies will more likely make arrangement through invoice discounting, not necessarily requiring funding entities to enter the transaction.

Total debt capital markets of US Bonds is $40tn, which includes asset backed securities, municipals, corporate debt, loans, treasury debt, etc. Those markets appear to be functioning, even in this dysfunctional, negative rate based world. The corporate bond market is around 9 trillion. Can the market absorb $500 billion or trillion more in supply chain finance assets? You bet. But it depends on the right price, structure, technical understanding, regulation, and knowledge and access to investors drive capital markets.

It is a fascinating area of working capital management and as rates start to return to historical levels, along with the potential for some easing of regs over the next several years, we think SCF will see larger take-up.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

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