Bank of England Governor Andrew Bailey criticized Lex Greensill – saying the Australian banker’s now bankrupt business was far less innovative than he claims.
During today’s testimony before the Treasury Committee, Labor MP Siobhain McDonagh asked Bailey if potential claims were “the latest development of the 21st century in supply chain finance, or foresight. “.
[prospective receivables is the practice of issuing loans against invoices against future business, rather than against invoices for goods that have actually been delivered].
Bailey responds that inventory finance is a very old financial instrument that has a very important role – it enables trade, provision of goods and has a proven track record.
In its basic form, it is a very simple form of financial activity.
It’s not rocket science, it’s not fintech. It does not imply large amounts of innovation.
Mr. Greensill sometimes presents him as if he had discovered the secret of the universe.
Bailey adds that this was an innovation in Greensill’s business, perhaps a useful innovation.
But he then raises two concerns, and reasons to be skeptical:
First, the financing of future receivables “looks more like an unsecured loan”.
Second, the accounting issue, and the suggestion that it can make a company’s debt smaller than it is, and the cash flow looks better than it is.
There are reasons to be skeptical. There is no reason why this traditional form of invoice financing should not have a useful innovation. This is perfectly reasonable, but there are reasons to be skeptical in some areas.
McDonagh asks if Bailey shares his concerns that “50% of transactions” appear to have had no invoices, and the businesses involved regularly weren’t aware they were involved?
We haven’t regulated Greensill in any form or form, Bailey replies.
Clearly no one has regulated them. McDonagh retaliates.
Q: Are you concerned about these reports?
Bailey says yes, he would be worried if that was the case.
Q: Is this practice used by other companies?
Bailey says the BoE is not an expert in this area so I cannot comment.
Q: Are there any regulatory failures regarding Greensill?
Bailey says he has yet to see a case that Greensill should have been regulated on the basis of financial stability risk (because commercial lending is unregulated).
But when all the evidence is presented, there may well be “very, very difficult and regrettable practices.”