Why Standard Chartered Shut Down Its Diamond Unit

London--Standard Chartered Plc no longer will finance diamond traders and polishers after reevaluating its portfolio and determining there is too much risk for too little return in the sector.

The London-based bank began thoroughly reviewing all of its operations after CEO Bill Winters took over last year, looking to exit businesses generating low returns and/or that are vulnerable to large swings in loan impairment.

The trading and polishing sector of the diamond industry was certainly among those in Winters’ crosshairs, with the spike in defaults and bankruptcies last year--the bank was among those caught up in the massive Winsome Diamonds default--and the increased compliance reporting and regulatory capital costs associated with financing the industry.

In March, the London-based bank began to pull back, tightening its terms for lending to the diamond sector by asking dealers to provide more collateral or take out insurance protection on their loans.

Then, last week, JCKOnline.com broke the news that Standard Chartered would be exiting the diamond sector entirely.

In an official statement, the bank said that continuing to provide financing to diamond traders and polishers “falls outside of the bank’s tightened risk tolerances.”

A Standard Chartered spokesman added that it will still bank the mining and retail segments of the supply chain; its decision impacts only the mid-stream, meaning diamond traders and polishers.

A timeline for Standard’s shutdown of its diamond division has not yet been determined, though the bank said it is “working with clients to ensure a smooth exit.”

Eric Tunis, a partner at New York-based accounting and consulting firm Friedman LLP, said the news that Standard Chartered would no longer bank the diamond sector “wasn’t something that was shocking.”

There have been a number of warning signs, including the tightened lending restrictions and, very recently, the bank’s absence from the Las Vegas trade shows. Tunis said this is the first time he can recall not seeing anyone from Standard Chartered in Vegas.

He said the struggle with profitability among diamond manufacturers leading to loan defaults in the mid-stream, the slim margins banks now make when lending to diamond companies, and the general lack of robustness in the trade right now all make banks averse to financing it.

Friedman Co-Managing Partner Harriet Greenberg said compliance issues also are a factor.

Larger money center banks face hefty fines if it’s found that their clients are involved in money laundering, a practice many perceive to be rampant in the diamond industry.

“There’s a