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Monday, November 28, 2016

Foreign bank lending dominates trade finance


Good backgrounder examining issues related to possible US tariffs on imports ... here's the nugget:

around 80% of commercial bank and ECA-backed trade finance lending into Asia is from non-US institutions

So accordingly practically all changes of the foreign exchange rates vs. USD are a function of foreign institution balance sheet regulatory adjustments in response to USD price changes of the financed products.

Check and checkmate.






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6 comments:

  1. mike normanNovember 28, 2016 at 9:37 AM

    Good find.

    You mean, it's not about "making the currency harder to get?" Hahaa.

    ReplyDelete
  2. AndréNovember 28, 2016 at 10:43 AM

    Although I'm not the smartest person on earth, I'm also not the dumbest.

    But I'm unable to understand what you mean. Can you help me?

    ReplyDelete
  3. Matt FrankoNovember 28, 2016 at 4:42 PM

    Andre we have been looking into this for a while here.... i post what I come across when I see it...

    Long story short: If the price of the financed products goes down in USD terms, it reduces the value of the outstanding USD loans (assets to banks) against the products.... and the (mostly foreign ie ex-US) banks have to make regulatory adjustments in response in order to maintain a constant target capital:asset ratio....

    This imo is what results in the adjustment of the forex ratios if the CBs are not directly involved.... ie if the CBs delegate forex to the fiscal agents, those agents have limited and effectively fixed capital so the numerator is fixed... the denominator is what they can adjust so they regulate the composition of assets...

    ReplyDelete
  4. AndréNovember 28, 2016 at 4:58 PM

    Oh now I see. Thanks...

    ReplyDelete
  5. TofuNFiatRGood4UNovember 29, 2016 at 12:09 AM

    And if the CB(s) do become involved--doesn't the currency become harder (or easier) to get? Aren't CB action(s) the dominant force, when they occur?

    I don't fully understand your example but it's the clearest explanation--to me--of this point you've been making so far. As time permits I'd welcome more details from you.

    ReplyDelete
  6. Matt FrankoNovember 29, 2016 at 7:20 AM

    Tofu,

    As far as CB making it "easier to get", for the exchange rate, from the MMT rote-version flash card set: 'its about price not quantity.."

    CBs have authority to create new reserves (members have to compete for them) and are not capital ratio constrained like the member banks, so they (CBs) can work together to set the exchange rate ...

    ReplyDelete