The Impact of Recent Regulatory Reform on the Use of Supply Chain Finance: The Case of Reverse Factoring

Abstract

Short-term structured trade finance has traditionally received preferential capital treatment by regulators and financial agencies based on the premises that it was one of the safest, most collateralized, and self-liquidating forms of bank assets (Auboin M, Blengini I, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio, Working Paper, 2014). Despite this preferential treatment, concerns have been raised as to the potential impact of the Basel III requirements on various trade finance instruments (see, e.g. Auboin M, International Regulation and Treatment of Trade Finance: What Are the Issues? WTO Working Paper 2010–2009, Geneva, 2010; Auboin M, Blengini I, The Impact of Basel III on Trade Finance: The Potential Unintended Consequences of the Leverage Ratio, Working Paper, 2014; Committee on the Global Financial System (CGFS), CGFS Papers No 50 Trade Finance: Developments and Issues, Bank for International Settlements, 2014; Lasaga M, The impact of Basel III on Trade Finance, Working Paper, 2016; Michalski TK, Ors E, Demir B, Risk-Based Capital Requirements for Banks and International Trade, Working Paper, 2016). In this chapter, we aim to deepen our understanding on how banks use trade finance compared to other forms of lending in light of the new regulations. We explore the increasing use by banks of supply chain finance in the form of reverse factoring (RF) and its impact on overall value creation in supply chains. In particular, we analyse the motives for implementing RF schemes, how such schemes compare with traditional factoring and other trade finance arrangements, and whether their regulatory treatment provides further motives for banks to expand this line of business.