Financial Crisis and Letters of Credits
Everybody talks about the crisis: shares loose value fast and banks are unwilling to lend to each other and are ever more reluctant to lend at all.
For the LC business I see two developments:
1) The costs for LCs are rising.
This website reports of rising costs and fees for letters of credit in the oil trade. These higher costs simply reflect a perceived higher credit risk.
2) Banks are unwilling to issue LCs to their customers.
This author tells us that vessels loaded with US grain are sitting at buyers’ ports waiting to unload because importers can’t get a letter of credit.
Even collateralized loans seem to be difficult to get. The grain has already arrived and can be easily liened, but the banks ask for more.
Bankers who drunkenly handed out cash to any poodle have become teatotallers who soberly review credit applications over and over again without finding it in themselves to approve them ("How can he be creditworthy, he approached us for a loan"). With this attitude it makes sense that banks invest in negative yield (!) treasury bills, basically giving up doing any business and promising to investors to lose money but... think of the good news: we could lose a lot more.
Soundbites are inappropriate in this situation, but one thing is clear: The life of the banking industry has been changed for decades to come.
Comments
John
This author tells us that vessels loaded with US grain are sitting at
buyers’ ports waiting to unload because importers can’t get a letter of
credit.
John
http://www.jaman.com/people/JSullen/
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Honestly I doubt it's true
Honestly I doubt it's true considering present financial situation.. The recession is over and in present circumstances we had no such news that banks are unwilling to Issue LCs.
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Financial Crisis and Letters of Credits
Hi,
You're quoting a blog from 2008 as relevant? And seriously, what fool would ship vessels loaded with US grain to the destination port without holding a workable L/C in the first place.
If it's true then maybe that's indicative of the general financial incompetence in the USA that led the world to the brink!
Bob
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Nothing has changed
You said, 'The life of the banking industry has been changed for decades to come.' Nothing has changed, I am afraid, and nothing will. Remember what Churchill said. Something about man once in while stumbling across the truth, but then picking himself up and moving on as if nothing has happened.
So is the case with all of us. We - bankers and everyone else - never learn. Greed, aggressive lending, creative accounting and poor risk management - these have been the cornerstone of all financial Tsunamis. Once the present crisis blows over, we will soon forget this too, and continue with our short-sighted ways to the next big one.
Just a thought. Why all such financial Tsunamis happen in the U.S.?