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Industry
Banking’s New Order
By Marc Goldstein
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| Erik A. Jens
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Erik A. Jens was appointed chief executive officer (CEO) of ABN AMRO International Diamond & Jewelry Group (ID&JG) on February 1, 2012. He succeeded Victor van der Kwast, who had been CEO since 2007. Globally, ABN AMRO is the leading lender to the diamond industry. Jens has been with the bank more than 20 years and has held various senior executive and leadership positions. In January, in response to diamond industry concerns about credit availability in light of new regulations being imposed worldwide under Basel III, Jens spoke with Rapaport Magazine in an exclusive interview. Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, an international body, to strengthen the regulation, supervision and risk management of the banking sector.
Rapaport Magazine: Everybody’s feeling — and many are experiencing it firsthand — that the lending business and the credit rules are changing. Could you explain why, and why now?
Erik Jens: This is not an issue for the diamond sector alone. This phenomenon is merely a reflection of the global economy of today. The construction and the automobile industries, for example, are going through the same evolution. You have to realize that since 2008, everything has changed. That’s true for the diamond industry also, where the mining companies, the retail business and the diamantaires themselves are being asked to adapt. It’s only natural under these circumstances that diamond banks would be adapting as well so they can live by the new rules, one of which is a trend to deleveraging.
RM: Could you summarize the major points that are coming out of Basel III, which is imposing new requirements for all financing, including diamond financing?
EJ: Basel III is basically affecting the whole financial sector. To explain it briefly, let’s say that in order to be able to lend the same amount of money, banks’ reserve capital requirements are now higher than in the past. In parallel, there’s still room for extending credit, but the extent to which each bank will be doing so will depend on many more parameters going forward.
RM: Recently, you insisted that ABN AMRO is still as committed as it ever was to the diamond industry. If that’s true, how do you explain the tightening of credit that seems to be happening? Do you mean that all the changes you are making in your lending practices and policies are due to external circumstances only, and that nothing has changed with ABN AMRO internal policy?
EJ: Our bank, along with others, has been committed to this industry for decades and we intend to continue in that commitment. But we expect the diamond industry to be likewise committed to us and agree to make the necessary adjustments that are being asked of them.
RM: Has the risk/profit ratio in the industry worsened?
EJ: There’s undoubtedly a higher degree of volatility everywhere, a trend that’s certainly not likely to decline in the future. On the contrary. In the new global economy, diamantaires are no longer just in competition with one another for credit, but with all other businesses. Every bank will now decide what kind of companies they want to lend money to. The equation is simple: the better the client quality, the better the credit rating for the bank and the lower the capital requirement. From that perspective, within ABN AMRO, diamantaires will be compared to any other business department and assessed accordingly. In our credit practices, we’re going to look for the best risk/return ratios.
RM: Rumors are rampant that banks are determined that speculation with bank money must cease. In an effort to limit their exposure to speculators, banks are apparently now willing to call back loans that were supposed to be used in the diamond business but that were instead invested in areas such as real estate. What’s your opinion of the discussions on banks limiting their exposure?
EJ: More than ever, financing will be based on the strength of the underlying business. If you want to invest in real estate, go ahead, but borrow money for that specific purpose. It’s not a question of the size of firms. As I told you, it’s about sustainability. Big or small company — it doesn’t matter, as long as you have healthy business financials and profitability.
RM: What about the timing of these new credit restrictions? Now is probably the worst moment to call back or restrict credit, in a period where conducting business is very harsh, don’t you think?
EJ: It’s not the first time that business is facing a difficult period. Back in 2008, for instance, we kept our commitment to the market, in true partnership. However, even then, we asked our clients to adapt, giving them time to do so and sometimes even increasing their credit lines in consultation and in coordination with us. Today, our position is the same. We will actively work with our clients to come to a common understanding as to how to adapt to the coming changes.
RM: How can Antwerp compete globally when it is working under banking rules that are more severe than in the rest of the world?
EJ: More severe banking rules will sooner or later be a good thing. With them, you’re actually preparing yourself for the future and you’re building up your competitive advantages for the future. Basically, I think diamantaires should broaden their perspective to take a longer view and not just focus on today’s business.
RM: Everybody knows that financing the business using receivables — which can often be produced at will from intragroup trade — has been a major way for big companies to get cheap financing to invest in other businesses. Since ABN AMRO doesn’t seem to agree anymore with such practices, how will you proceed to monitor what is real turnover, and what isn’t?
EJ: I want to stress that we never agreed with such approaches and that is certainly not going to change.
RM: What are the current guidelines of your credit policy and what kind of data are you going to be requesting from your clients in the future?
EJ: You understand that we can’t disclose anything regarding our credit policy.
RM: The Indian press and the global press have both confirmed that banks in India are overleveraged with the diamond industry. The head of the Indian diamond industry has stated that Indian banks have loaned approximately $6 billion to diamond companies that used the funds to speculate in real estate, and those investments lost lots of money. The banks know for a fact that they’re unlikely to have those loans repaid completely. Can you comment?
EJ: There are about 55 banks involved with the Indian diamond industry and they each have their own policies. However, one thing is certain today. If banks expect to get transparency from their clients, banks have to be clear as to what transparency implies in terms of management, the kind of business, bookkeeping standards, etc.
RM: A few words about Basel IV?
EJ: My guess is that we should expect it to go one step further in the direction of tightening credit and capital requirements. The risk profiling of the banks will probably need to be further diversified. Currently, there are only two risk profiles: the system bank, which has a pure utility function, and the nonsystem or investment bank. Further distinctions in risk profiles could be added, and an interesting question would be to figure out in which category the diamond banking will end up.
Article from the Rapaport Magazine - February 2013. To subscribe click here.
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