Citigroup is launching a commodity trade finance business to capitalize on the pullback from the market by European lenders such as BNP Paribas.
The move comes as trading houses are finding financing thinner on the ground. European banks including BNP and Crédit Agricole are scaling back their presence to limit their need for scarce dollars and comply with tougher regulatory capital requirements.
John Ahearn, head of global trade at Citi , said the bank would start by financing energy deals before considering metals and “soft” commodities such as wheat. It has done ad hoc deals in the past, but now intends “to make it into a scale business”.
Citi, which has hired Kris Van Broekhoven from Deutsche Bank to head the new unit, is aiming to make more than $200m in net income from it within three years.
Commodity trade finance helps trading houses, many of which are relatively thinly capitalized, to fund large purchases. In a typical transaction a bank would fund a $200m deal where a trader buys an oil shipment from a producer, hold it on its balance sheet and sells it on to another broker or an end-user.
Although Citi is benefiting from the struggle of European banks to reach higher capital levels under new Basel III rules, Mr Ahearn warned the new standards could hurt the world economy.
“If global trade starts being impacted by Basel IIIyou could end up with a global economic downturn just because there’s not enough financing for global trade,” he said.
US bankers led by Jamie Dimon, chief executive of JPMorgan Chase , have also argued the new regime goes too far.
Citi is not immune to the need to improve capital levels under Basel III rules, but Citi executives believe it is further along the deleveraging road than some European rivals.
“We’ve been selling assets for years where a lot of our competitors are just really getting started,” said Mr Ahearn. “The competitive advantage US banks have is we lived through the pain earlier than the Europeans.”
Despite their pullback from the market, the largest players such as BNP, Crédit Agricole, Société Générale and ING, are trying to preserve business with the biggest trading houses, which include Glencore and Trafigura, according to market participants.
In another example of the US push into commodities markets, Jefferies, the US investment bank, this week started trading on the London Metal Exchangeafter hiring dozens of traders from European rivals.