Why Are Banks Leaving the Industry?

Bank Leumi’s announcement that it would end its U.S. diamond and jewelry lending is just the latest example of a financial institution leaving the industry. We are seeing quite a worrying trend where not only are banks leaving the business, but new ones are reluctant to enter. 

For perspective, I turned to former industry banker Jeff Pfeffer, who told me the following:

If you look at the last ten years, maybe three quarters of a billion dollars of financing has left the industry. And now there are not a lot of places for clients to go. If Standard Chartered closed their doors tomorrow, what would happen to its clients?

What caused all this? First, the Fabrikant bankruptcy was a huge dislocation to the industry. It caused all the banks to rethink their posture in this space.

Second, most of the banks never understood the business. They were not international, and many diamond and jewelry companies are international. 

Asset-based lending would have been the right model for the industry, except from a cost-of-capital standpoint, the margins don’t work. You have memo goods that are considered a sale, yet they act like consignment, because the merchant can return them. Companies are competing on price alone with little differentiation, with no new products and too many companies chasing too few retailers in the United States.

Finally, the general lack of transparency, the reluctance to pay taxes, the ability to move wealth offshore, the allegations of money laundering, the issues in the supply chain, all these things have skewed things from the banker’s perspective. Basel III with its capital requirements has forced the banks to look at risk-return. This industry has too much risk, and not enough return. There are a lot of honest, well-run business out there, but they are caught up in this cycle. 

So it’s not one factor, but all of these together, that have made banks pull out of the industry.

What I think the industry needs to is go out and resell itself to banks that don’t have a history with it and are willing to approach it with an open mind. Or there could be a cooperative approach, where some of the big diamond houses could get together and buy a bank and fund the business. The big problem would be, if you knew the bank’s board of directors was filled with your competitors, would you share information with the enemy?

Right now, no financing source—be it banks, asset-based lenders, or private equity groups—is looking to finance this industry. Over time, the smaller, less capitalized businesses will not make it into the future. It’s just a very difficult position for the industry.

JCK News Director