Banks should tackle institutional investors’ lack of education around trade finance assets in order to fill the liquidity void generated by Basel III, according to new research.

In its Cracking the Code research paper, Vancouver-based Global Business Intelligence (GBI) points out that Basel III regulations will open up space for insurers and institutional investors to get involved in trade transactions, but that banks have not yet found the right way to engage with these investors.

David Gustin, GBI’s president, tells GTR: “The best engagement point is probably conferences, where pension funds, family offices, and insurers get together to discuss their asset allocation strategy. These are big engagement points because they enable the banks to meet the people who make the decisions – paid consultants a lot of the time.”

He adds that institutional investors should not be seen as competition by banks, and that distributing assets among them would be better than among other banks from a competition point of view.

“The Basel III capital issue has gone a long way in terms of pushing this up to the forefront and identifying that there are new challenges in the banking industry and informing the non-bank community that there are opportunities for them.”

According, to Gustin, the lack of publicity around trade finance deals is also an obstacle that needs to be overcome in order to attract alternative investors.

“When a fixed income professional is told to look for investment, the first thing they do is look at a Bloomberg screen, and if it doesn’t exist on Bloomberg it doesn’t exist. If you do a search on the loan sector, there are hundreds of thousands of types of loan that you can buy and trade finance gets lost into that category. There is no description of trade finance transactions and most institutional investors don’t understand the nuances of trade.

“When hedge funds buy these assets, they have connections to the banks and they understand the difference between a Ukrainian steel deal and a Mongolian copper deal, and an Angolan cotton deal; they have the expertise to understand the complexities involved in those deals, whereas institutional investors do not have the resources to understand that,” he says.