HKUST Business School Magazine

Biz@HKUST 52 // Cover // Insight Smooth intermediation with strengthening financial regulation might improve, rather than hinder, real international trade flows. followed by changes in the structure of supply chain networks for that country, i.e., whether new supply chain relationships are formed or broken. To make a concrete example, we ask whether Thailand’s Anti- Money Laundering Act of 2015 increased or decreased the number of supply chain relationships between Thailand and the foreign countries. Our preliminary evidence suggests that tight AML/KYC regulations have a positive effect on supply chain formation. In Figure 1, we show that, in the years surrounding an AML/KYC law change in South-East Asia, on average every second international firm added one extra supplier from countries that tightened their AML/ KYC regulations, relative to other South-East Asian countries that did not change their AML/KYC laws around the same time. Our results shed light on a relatively unexplored issue in academic finance – the role played by international banks in the intermediation of international supply chains. With this, this project aims to inform the current debate on the costs and benefits of uniform financial regulation across countries. Our findings suggest that ensuring smooth intermediation with strengthening financial regulation might improve, rather than hinder, real international trade flows. Thus policymakers should take into account the effects beyond the direct effects on local banking markets when considering strengthening AML/KYC regulations. Supply chain financing has attracted media and policymaker attention recently with the collapse of Greensill Capital, a specialized lender. This controversial event further highlights the need for robust financial intermediation to soften other frictions that restrict international trade, such as possible post-pandemic restructuring of supply chains and crumbling trade liberalization. Reference 1. The Asia/Pacific Group on Money Laundering (APG), Malaysia’s MER 3rd Enhanced Follow-Up Report from 2019 and Myanmar’s 2nd Follow-Up Report from 2020. 2. Alisa Di Caprio, Steven Beck, Ying Yao, and Fahad Kahn, 2016 Trade Finance Gaps, Growth, and Jobs Survey, ADB Briefs. Datasource: Factset Revere, period 2007-2018, Southeast Asian countries