The Commercial Banker Reigns Supreme Again
A new financial industry pecking order beckons in a world riven by tariffs and trade wars.
In the late noughties, the financial industry had a strict hierarchy in Hong Kong.
The euphemistically, somewhat artificially labelled «i-banker» came first, perched alongside the equities trader. In distant second, a mostly interchangeable commercial and private banking set, and then, in very last, the almost unmentionables toiling away in retail.
Faded Luster
Since then, a sizeable Hang Seng correction and a crypto winter later, the hierarchies have become a bit more fluid, even if your average prospectus-wielding M&A staffer doesn’t like to see it that way.
To wit, it looks like the industry’s food chain could be in for another upheaval. The commercial banking profession, once largely seen as a sleepy, backwater for the ambitious financial sector neophyte, could be back and bigger than ever, ready to play a critical role in the world of Trump 2.0.
Securitization Questions
But let’s take a step back first. Commercial banking had fallen by the wayside to the other disciplines as a result of the growth in commercial paper and things like junk bonds, which reduced the importance of bank lending for purely trade related purposes. Tech also allowed businesses to directly access capital markets, which became another way to bypass old-fashioned merchant bankers.
Now, however, with the jack-in-the-box nature of Trump’s eradication of the postwar Pax Americana, there is likely to be a resurgence in demand for hands-on risk management in trade finance. In short, there is no junk bond prospectus out there that can ably deal with a 25 or 50 percent overnight increase in raw material or selling prices, no matter what you write in your risk factors disclosure.
Manual Risk Management
AI, generative or not, won’t be of much help either, as it tends to reflect the steady, past state of the internet at a specific point in time.
Commercial banking teams are likely going to become experts in manual risk management for trade purposes, helping clients manage the volatile pricing changes, and any supply chain disruptions.
Merchant Banking Revival
To protect their own institutions, they are also going to have to keep closer tabs on credit risks, particularly when they are lending against invoices, a job that had in recent times been mostly one of tabulating goods shipped against actual delivery.
The ability of the largest institutions to provide liquidity and manage funding is going to become a vital imperative in these periods of heightened uncertainty, which could also fuel a secular revival of the world’s largest merchant banks.
Financial Black Hole
But those are all matters for our now uncertain economic future. In the intervening meantime, a commercial bank’s most important role may be simply to help clients navigate the looming minefield of freight, shipping and unexpected charges.
There are going to be untold instances where bulk carriers and container ships, which can take more than a month to ply their way between destinations, become impromptu, unintended financial black holes in the middle of the ocean.
Similar Pattern
As we wrote in November after Trump was elected, this all bears a similar pattern to what happened almost exactly a century ago during the Great Depression, when worldwide trade collapsed after the US Smoot-Hawley Tariff Act in 1930 raised average tariffs by 20 percent, precipitating the failure of banks worldwide.
It is more than likely that the long-ignored commercial bank will now have to step in and prevent that from happening this time around.
Hoover 2.0
Although it is too early to say what the ultimate effects of the current tariffs on world trade are, it could very well be that Trump's second time around may eventually end up looking more like Hoover 2.0 than anything else. And right now, the financial markets seem to agree, taking a very dim view of the goings on.
The only thing we can be sure of is that the workload of the average commercial banker in Asia is going to require a great deal of specific expertise, and client hand-holding, from here on out.
