Trade and Trade Finance in the 2008-09 Financial Crisis
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Global merchandise trade sharply declined in late 2008 and early 2009, and some press and financial market reports assigned a large role for the decline to trade finance. However, the available evidence suggests that shocks to trade finance were not the major factor in the decline in trade. Surveys of commercial banks by the IMF and others found that while bank-intermediated trade finance fell in value during the crisis, it fell by less than merchandise trade. As a result, the share of world trade supported by bank-intermediated trade finance increased despite higher pricing margins. Other explanations appear to account for the bulk of the reduction in international trade.

Abstract

Global merchandise trade sharply declined in late 2008 and early 2009, and some press and financial market reports assigned a large role for the decline to trade finance. However, the available evidence suggests that shocks to trade finance were not the major factor in the decline in trade. Surveys of commercial banks by the IMF and others found that while bank-intermediated trade finance fell in value during the crisis, it fell by less than merchandise trade. As a result, the share of world trade supported by bank-intermediated trade finance increased despite higher pricing margins. Other explanations appear to account for the bulk of the reduction in international trade.

I. Introduction

4. The focus of this paper is on short-term trade finance arrangements in which the banking system provides lending, insurance against nonpayment, or both in support of international trade.

5. Trade finance covers a spectrum of payments arrangements between importers and exporters.2

  • The largest share of global merchandise trade has been financed on an open account basis, in which importers repay exporters directly after receipt of goods without either insurance or lending from third parties. In this context, exporters supply both working capital to importers and take on the risk of non-payment.

  • Cash-in-advance arrangements are at the opposite end of the spectrum from open account. In these, importers pay for goods before they are shipped, and this places both non-performance risk and the burden on working capital on the importer.

  • Bank-intermediated trade finance allows importers or exporters to shift some of the nonpayment or non-performance risk to banks or obtain bank financing to allow the exporter to receive payment before the importer is required to make it. Insurers and other non-bank financial institutions also participate in trade finance markets in a manner similar to banks.

  • There are also public sector entities such as export credit agencies (ECAs) and that have an overlapping role with commercial banks and multilateral development bank (MDB) programs that work through banks providing a secondary guarantee or liquidity to the banks.

6. Assessment of trade finance conditions is complicated by the absence of organized markets for bank-intermediated trade finance and the proprietary nature of bank information about customer relationships. To fill this gap during the current crisis, the IMF staff and the Bankers’ Association for Finance and Trade (BAFT), now merged with International Financial Services Association (BAFT-IFSA) have conducted four surveys of banks on trade finance between December 2008 and March 2010 and covering developments from the fourth quarter of 2007 through the fourth quarter of 2009.3 In addition, the authors have had the opportunity to discuss trade finance with many representatives of commercial banks, ECAs, and other market participants in the context of outreach, conferences, and bilateral discussions.

7. This paper assesses recent developments in trade and trade finance and evidence for causes and effects to arrive at some conclusions on the role of trade finance on merchandise trade patterns during the 2008-09 crisis. Section II provides background on developments in international trade and financial markets during the crisis as context for assessing developments in trade finance. Section III discusses the evidence from the recent surveys of banks sponsored by the IMF and the BAFT-IFSA. Section IV considers factors other than trade finance that contributed to the drop in trade during the crisis. Section V reviews the policies taken by official Export Credit Agencies (ECAs) to mitigate gaps in trade finance. Section VI concludes. Several appendicies provide additional detail on the survey results, background on trade finance institutions, and detailed information on the programs on export credit agencies.

II. Trade and Financial Market Developments in 2008-09

8. Global trade entered the financial crisis already unsettled by other developments. The sharp drop in trade in late 2008 came after a period of turmoil in global commodities trade. In 2007 and early 2008 prices of both food and fuel increased sharply, with wheat prices doubling and rice prices almost tripling. Following difficult harvests in Australia and India (among others), several countries banned exports to keep staple food prices lower internally. Fuel prices in 2007 rose around 50 percent, mostly from increased demand, which also affected fertilizer prices (some of which is produced from natural gas), lowering potential agricultural output. Against this backdrop, there were reports that futures contracts were being broken, as the high prices on the spot market more than compensated for having to pay penalties. This led to fears that more widespread market breakdowns would occur, and buyers became more worried about counterparty risk.

9. The disruption to trade finance in late 2008 and early 2009 did not occur in isolation; it took place against a backdrop of the sharp fall in international trade and a broader disruption to global financial markets. The bankruptcy of Lehman Brothers in September 2008, coming on the heels of lesser financial market failures, exacerbated concerns over counterparty risk in the financial sector caused short-term funding costs to spike, and the turmoil in financial markets spilled over into goods markets. Emerging markets, which had been assumed to have decoupled from developed country growth, were shown to be still dependent on exports. Anecdotal reports of banks refusing to honor trade finance instruments exacerbated this impression. The magnitude and timing of developments in international trade and broader financial markets provides some context for assessing developments in trade finance, and the influence of these markets on trade finance and vice versa.

A. International Trade

10. International trade had a sharp and globally synchronized fall in the second half of 2008 and early 2009. Exports of advanced, emerging, and developing economies were all growing robustly through mid-2008 before dropping sharply in the second half of 2008 and early 2009 (Figure 1). The reversal was most pronounced for developing economies in which the effects of rising partner country demand for commodities until mid-2008 and the subsequent sharp fall in demand were reinforced by a commodity price boom and decline following a roughly similar time path. Although exports of advanced, emerging, and developing economies stabilized in early and mid-2009 and have recovered sharply in late 2009/early 2010 in most major economies (Figure 1a), trade was still much lower in early 2010 than at the mid-2008 peak (Figure 1b).

Figure 1a.
Figure 1a.

Growth Rates of Merchandise Exports 1/

(Percent growth relative to the same month in the previous year, in USD)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

1/ Trade data on industrial, emerging, and developing countries are based on 31, 32, and 20 countries with a few exceptions: for Jan-10 data, 31, 31, and 19 countries are used respectively; for Feb-10 data 31, 29, and 18 countries are used respectively; for Mar-10 data 31, 28, and 15 countries are used respectively. Source: IMF Staff calculations, Haver Analytics, WTO.
Figure 1b.
Figure 1b.

Merchandise Trade Index 1/

(January 2008=100, in USD)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

1/ Trade data on industrial, emerging, and developing countries are based on 31, 32, and 20 countries with a few exceptions: for Jan-10 data, 31, 31, and 19 countries are used respectively; for Feb-10 data 31, 29, and 18 countries are used respectively; for Mar-10 data 31, 28, and 15 countries are used respectively.Source: IMF Staff calculations, Haver Analytics, WTO.

B. Financial Markets

11. The financial crisis touched off by the September 2008 collapse of Lehman Brothers was manifested in sharply tightened credit conditions in September and October of 2008. Borrowing costs for even the strongest banks rose immediately as LIBOR rates rose by roughly one full percentage point (Figure 2). However, policy rates of major central banks responded quickly and brought LIBOR rates down to pre-Lehman levels within a few weeks and by more than three percentage points from pre-Lehman levels by the second quarter of 2009.

Figure 2.
Figure 2.

Global Funding Pressure

(In percent, average of Euro area, U.K., and U.S. rates)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Bloomberg.

12. The impact of increased cost of funds was spread unevenly across between advanced and emerging markets and among banks and non-banks within those income groups. The interest rate spreads above policy rates rose and fell rapidly in advanced economies (Figure 3a), coming close to pre-crisis levels by January 2009 and dropping below pre-crisis levels by mid-year. Emerging market spreads rose by a much larger margin and fell much more gradually and were still above pre-Lehman levels in the first quarter of 2010 (Figure 3b).

Figure 3a.
Figure 3a.

3-Month LIBOR Spreads To OIS

(Overnight Index Swap, bps)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Bloomberg.
Figure 3b.
Figure 3b.

Emerging Markets - External Debt Market Spreads

(bps over treasuries)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Bloomberg.

13. The disruption to lending was correlated to the distance between the borrower and the ultimate holder of the debt. Loans to non-financial firms dropped by 14 and 1 percent in the U.S. and the Euro area respectively between 2008 Q4 and 2009 Q3 (Figure 4). However, the decline in commercial paper volumes was much more pronounced. U.S. commercial paper volumes fell by 22 and 40 percent for financial and non-financial issuers respectively over the same period (Figure 5). The much sharper decline in traded commercial paper may reflect the widely-reported lack of trust in all securitized debt following the onset of the crisis even though commercial paper is a direct obligation of the borrower.

Figure 4.
Figure 4.

U.S. and Euro Area Loans

(stocks, Euro and USD billion)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Fed, ECB.
Figure 5.
Figure 5.

US Commercial Paper: Outstanding Amounts

(USD billion)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Bloomberg.

14. Secondary markets, in which financial assets are resold by the original lender, were even more severely affected in terms of both volumes and spreads.

  • Secondary market volumes for asset-backed securities fell by more than three quarters between mid-2007 peak levels and 2010 Q1; this is an earlier and much more severe decline that for primary market lending (Figure 6).

  • Secondary market spreads rose much more than lending spreads in general (Figure 7) with spreads on asset-backed securities rising more than ten-fold to peak at nearly 1000 basis points.

Figure 6.
Figure 6.

Asset-Backed Securities Deal Proceeds

(USD billion)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Dealogic.
Figure 7.
Figure 7.

Merril Lynch ABS Master Index, Fixed Rate

Option Adjusted Spread 1/

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

1/ Spread net of any embedded options.Source: Bloomberg.

15. A few overall observations can be taken from these trade and financial market data. Merchandise trade fell sharply and at a much faster rate than the decline in GDP during the 2008-09 crisis. However, this is a typical pattern in economic downturns and the decline in both trade and economic activity were well underway before the collapse of Lehman Brothers. Direct lending from banks to final borrowers in advanced economies fell during the crisis, but at a much slower pace than securitized or asset-backed lending.

III. Evidence on Bank-Intermediated Trade Finance

A. Overview

16. Bank-intermediated trade finance was affected by the crisis along with other financial markets. However, bank-intermediated trade finance largely held up during the crisis. Banks were increasingly cautious with real-sector customers and counterparty banks, and pricing margins often increased. However, these factors were more than offset by an increase in risk aversion on the part of exporters seeking protection from risk. As a result, the share of world trade supported by bank-intermediated trade finance appears to have increased during the crisis. The causes of the increased price and decreased value of trade finance appear to be mostly spillovers from broader financial markets and the recession-induced decline in the value of international trade rather than specific problems in trade finance markets themselves.

17. IMF staff together with the BAFT-IFSA and with the assistance of many other organizations have conducted four surveys of commercial banks to fill gaps in information on commercial bank trade finance since December 2008 (Box 1). The surveys have come from banks of widely varying sizes from banks in countries of all income groups and major geographic regions. Summary data on the characteristics of banks responding to the fourth survey are shown in Table 1.4 The average bank responding to the survey is active in trade finance in three major regions and has branches in two regions. With the exception of sub-Saharan Africa, one-fifth or more of the banks were active in each region with coverage of emerging Asia, industrial countries, and Latin America being particularly high.

Table 1.

Summary of Respondents 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

The total number of respondents is 100.

Why Surveys? IMF/BAFT-IFSA and Other Survey of Banks

Market conditions for trade finance are difficult to assess because of the absence of data. Bank trade finance is generally based in relationship banking with individual clients, Pricing and availability of bank-intermediated trade finances depends on a complex web of relationships between client, counterparty, and counterparty banks. As such, data are intermingled with proprietary information about bank-client relationships and are difficult to come by. Data on open account and cash-in-advance transactions are similarly tied into individual customer relationships, but data are even harder to come by in the absence of the information clearinghouse role provided with transactions channeled through banks.

The IMF and BAFT-IFSA conducted four surveys of commercial banks between December 2008 and early 2010 to fill these information gaps. All four surveys were designed mostly by IMF staff with the participation of BAFT-IFSA and member banks and direct input from the European Bank for Reconstruction and Development (EBRD) and HSBC. The surveys were distributed primarily by BAFT (BAFT-IFSA for the fourth survey) with the assistance of many cooperating public and private sector organizations. In particular, valuable assistance in further distribution was provided by Federación Latinoamericana de Bancos (FELEBAN). Data were compiled and summarized by FImetrix for the second through fourth surveys. The third and fourth surveys also benefited from collaboration with the Banking Commission of the International Chamber of Commerce (ICC) on survey design and assistance from the Asian Development Bank (ADB) and the EBRD in promoting responses in their regions of operations. The ICC has also conducted its own surveys and published the results (ICC, 2009; ICC, 2010). Although IMF/BAFT –IFSA and ICC surveys have different focuses and different sets of respondents, the results tend to be broadly similar where the survey questions have overlapped.1 BAFT-IFSA, the ICC, the IMF, and other institutions involved in earlier surveys are collaborating on new surveys on trade finance market conditions.

1The IMF/BAFT-IFSA surveys are designed mostly to support economic analysis of changes in bank trade fiannce. The ICC survey on the other hand has focused more on bank experience with the functioning of legal and procedural aspects of bank experience with trade finance transactions.

B. Value of Trade Finance

18. The value of trade covered by bank-intermediated trade finance held roughly even rose during the first phase of the crisis (2008 Q4 vs. 2007 Q4) even as the value of trade fell sharply (Table 2 and Figure 8). During the most intense period of the crisis (January 2009 vs. October 2008), trade finance did decline in value by amounts on the order of 10 percent, but the value of merchandise trade fell much more sharply during the same period. In almost all regions and periods through 2009 Q2 the decline in the value of trade finance activities was smaller than in merchandise trade or trade finance value rose even while exports were falling. Although importing and exporting firms can freely choose between open account, bank-intermediated trade finance, and cash-in-advance by mutual agreement, the incentives have shifted during the crisis. The smaller decline in trade finance presumably reflects a sharply heightened risk aversion of the part of real sector trade participants, and their attempt to address this by shifting some of the transaction risk to the banks. There were signs of recovery in trade, and a more widespread recovery by 2009 Q4 as the growth in the value of trade finance was outstripped by the recovery in the value of merchandise trade in most regions (Table 2 and Figure 9).

Figure 8.
Figure 8.

Overall Changes in Merchandise Exports and Trade Finance

(percent growth)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Notes: The overall change in trade finance is computed as the weighted average of regional changes by level of activity in respective region.The respondents’ samples differ across surveys.Source: IMF/BAFT-IFSA Trade Finance Surveys (July 2009 and March 2010), Haver Analytics, IFS, WTO.
Figure 9.
Figure 9.

Changes in Merchandise Exports and Trade Finance: by Groups of Countries

(percent growth)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey (March 2010), Haver Analytics, IFS, WTO.
Table 2.

Changes in Merchandise Exports and Trade Finance: By Groups of Countries

(percent growth)

article image

Based on March 2009 survey. Country catego ries used in this survey are broadly consistent, though not identical to the ones in the next two surveys.

Based on July 2009 survey.

Weighted average of regional changes by level of activity in respective region.

Note: The respondents’ samples differ across surveys.Source: IMF/BAFT-IFSA Trade Finance Surveys (March 2009, July 2009, March 2010), Haver Analytics, IFS, WTO.

19. The relatively resiliant value of trade finance is also reflected in an increased share of global trade moving from open account to both bank-intermediated trade finance as the crisis progressed. Banks estimate that open account transactions fell below the level of bank-supported trade finance in the second quarter of 2009 (Figure 10). These trends appear to reflect increased risk aversion on the part of both banks (increased margins) and nonfinancial corporations (the decline in the share of open account).5 The slight decline in bank-intermediated trade finance in the most recent period presumably reflects a return toward the long-term trend of a shift to open account as the crisis abated.

Figure 10.
Figure 10.

What is your “best” estimate for the composition of the Trade Finance industry as a whole?

(percent)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

1/ Figures are from the July 2009 survey.Note: The respondents’ samples differ across surveys.Source: IMF/BAFT-IFSA Trade Finance Surveys(July 2009, March 2010).

C. Reasons for the Change in Value of Trade Finance

20. Banks mostly attributed both the declines and increases in the value of trade finance to demand factors. Of these demand factors, the change in the value of trade was by far the most important with the rise or fall in commodity prices a distant second (Tables 3 and 4).6 Supply-side factors such as credit availability at either their own institution or counterparties, and shifts to or from open account or cash-in-advance transactions were factors cited by significant minorities of institutions. Looking across different size classes of banks, credit availability factors seemed to be relatively more important at large banks, presumably reflecting the greater need for deleveraging at some of the largest institutions.

Table 3.

Reasons for the Decline in Value of Trade Finance 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

This reflects only the views of the 61 respondents that reported a decline in value of trade finance in at least one geographic region presented and that subsequently marked at least one option for the current question.

Table 4.

Reasons for the Increase in Value of Trade Finance 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

This reflects only the views of the 76 respondents that reported an increase in value of trade finance in at least one geographic region presented and that subsequently marked at least one option for the current question.

21. Banks adopted stricter risk management practices in response to higher risks. (Figure 11 and Table 5). There was greater differentiation based on individual clients, the client business segment (trading, retail, commodities, etc.), and home country. Banks have also limited their own risk through expanded insurance, shorter maturities and stronger covenants, and higher cash deposits or other collateral from clients. Among the relatively few banks that reported a loosening of standards (Table 6), the same factors predominate. Across size classes of banks, large banks were more likely to use greater caution vis-à-vis certain countries than other banks and were also more likely to request confirmations or export credit insurance. On the other end of the size spectrum, small and medium-sized banks were more likely to manage risk with greater collateral or stronger covenants. The 2010 ICC survey also examined SWIFT message data and found evidence of increased risk aversion by banks and customers such as refusals to honor letters of credit because of discrepancies in documents (ICC, 2010).7

Figure 11.
Figure 11.

Overall Change in Trade-related Lending Guidelines, 2009Q4 vs. 2008Q4

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table 5.

Change in Trade-Related Lending Guidelines: Tightening 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

This reflects only the views of the 53 respondents that reported a tightening in trade-related lending guidelines from 2008Q4 to 2009Q4 and that subsequently answered this question.

Table 6.

Change in Trade-Related Lending Guidelines: Loosening 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

This reflects only the views of the 6 respondents that reported a loosening in trade-related lending guidelines from 2008Q4 to 2009Q4 and that subsequently asnwered this question.

22. Most banks of all sizes indicated that they could satisfy customer demands for trade finance in the April 2010 survey, although a substantial minority of large banks indicated that they could not (Figure 12). This is consistent with the greater emphasis in credit availability concerns at large banks (Tables 3 and 4) and also with the perception that large banks have been more heavily affected by the need for deleveraging.

Figure 12.
Figure 12.

Have you been able to satisfy all of your customer needs?

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

23. Secondary markets in trade-finance receivables do not appear to have been significantly affected by the crisis as far as can be determined by the survey evidence. Most banks reported no change in the use of secondary markets in both 2008 Q4 and 2009 Q4 against the same period a year earlier, and nearly twice as many banks reported increased use of secondary markets as reported decreased use (Figure 13). This is somewhat surprising given the more negative trends in commercial paper and especially asseted-back securities trading in broader financial markets (Figures 4-7). The responses on the use of secondary markets for trade finance were also broadly similar across banks of different sizes (Appendix I, Table I.8; Appendix II, Table II.16).

Figure 13.
Figure 13.

Have you seen a change in the use of secondary markets?

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

D. Bank Pricing and Credit Conditions for Trade Finance

24. The survey evidence on pricing is also consistent with a demand-driven story in which the decline in trade finance plays no more than a modest role in the decline in merchandise trade. The survey results indicate some increased pricing for trade finance, at least relative to banks’ cost of funds (Figures 2 and 3). Other things being equal, this should have reduced the use of bank-intermediated trade finance as a share of trade The increased share of bank-intermediated trade finance in spite of increased pricing also suggests that demand factors such as exporter risk aversion dominated.

25. Average pricing margins for trade finance rose during the crisis, but less than half of the banks increased pricing in any single period. More banks increased pricing than decreased pricing relative to banks’ costs of funds. However, a majority of banks either held pricing steady or reduced pricing in the periods 2007 Q4 to 2008 Q4 (Table 7a), 2008 Q4 to 2009 Q2 (Table 7b), and 2008 Q4 to 2009 Q4 (Table 7c). However, because the large banks account for a substantial majority of trade finance, average pricing margins for trade finance as a whole almost certainly increased; the largest banks were much more likely to increase pricing and by larger average amounts than the unweighted averages for all banks shown in the tables. These data suggest that pricing pressures eased in the 2009 as the difference in the share of banks reporting increases versus decreases in pricing fell sharply (Figure 14). The average increases in pricing were moderate for most of those banks reporting increases, particularly in 2009 (Figure 15).

Figure 14.
Figure 14.

Has the pricing of the following trade instruments been affected by recent developments?

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Figure 15.
Figure 15.

Change in Pricing

(bps over cost of funds)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table 7a.

Pricing Changes by Size of Bank, 2008Q4 vs. 2007Q4 1/

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Mean figures are percentage changes in the pricing margin above bank cost of funds. Mean and median figures do not include responses for which detailed pricing data were not provided.

Table 7b.

Pricing Changes by Size of Bank, 2009Q2 vs. 2008Q4 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, July 2009.

Mean figures are percentage changes in the pricing margin above bank cost of funds. Mean and median figures do not include responses for which detailed pricing data were not provided.

Table 7c.

Pricing Changes by Size of Bank, 2009Q4 vs. 2008Q4 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Mean figures are percentage changes in the pricing margin above bank cost of funds. Mean and median figures do not include responses for which detailed pricing data were not provided.

26. There is some differentiation in the factors banks see as affecting pricing of trade finance according to the size of the banks. Roughly similar shares of large, medium, and small banks reported increased pricing margins due to increased bank cost of funds, with the share of banks citing this factor falling from about two-thirds in late 2008 to just under half in the first half of 2009. However, increased risk of trade finance lending relative to other bank lines of business was a greater concern for small and medium-sized banks in the latter period (Table 8). Conversely, increased capital requirements were cited more often by large banks.

Table 8.

Reasons for the increase in prices 1/

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

This reflects only the views of respondents that reported an increase in pricing and that subsequently answered this question.

27. There was a wide divergence of views on the impact of Basel II8 capital requirements between large and other banks with large banks were also more concerned about the impact of Basel II on their ability to provide trade finance (Table 9). This is consistent with the more frequent citation of increased capital requirements as a factor behind increased pricing margins. Also consistent with the survey results on factors behind increased pricing, no small banks and only a minority of medium-sized banks cited Basel II as having a negative impact on their ability to provide trade finance. Interestingly, a minority of banks of varying size cited Basel II as having a positive impact on their ability to provide trade finance. As with the dispersion in the response of banks on pricing, this may reflect differing initial capital and risk requirements leading to an increase in the relative competitiveness of the more conservative banks once Basel II requirements are in effect.

Table 9.

Impact of Basel II on ability to provide trade finance 1/

(percent of respondents)

article image
Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Includes only respondents reporting price increases due to increased capital requirements and that subsequently marked at least one option for the current question.

28. In addition to capital requirements and banks’ costs of funds, the probability of default decreased over the course of 2009 (Figure 16). The majority of respondents indicated that there was no change in defaults and net only 13 percent (i.e., the difference between the percentage reporting an increase and the percentage reporting a decrease in defaults) reported an increase in default risk in 2009 against a net of 30 percent between 2007 Q4 and 2008 Q4. However, perceived higher default risks continue to price up the price of credit—among the respondents in the July 2009 survey indicating they had increased prices, 47 percent of respondents identified default risk as a significant force in higher margins, with the increased cost of funds as a leading reason for higher margins (52 percent of respondents) – see Appendix II.

Figure 16.
Figure 16.

Change in the probability of default

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

29. The increased pricing margins that came with the crisis may be a persistent phenomenon regardless of developments in defaults and Basel II (or Basel III) requirements. Although this is not addressed by the surveys, a widely held view among market participants is that markets are unlikely to return to pre-crisis conditions because trade finance pricing margins were artificially low before the crisis, as was also the case with other types of short-term financing. This is consistent with the view by banks that trade finance was often a “loss-leader” service provided to maintain client relationships, and that banks were putting insufficient capital behind risk in general. In equilibrium, prices may have to be higher, but it is unclear at what level they should settle.

E. Summary of Survey Results

30. Bank-intermediated trade finance largely held up during the crisis even as it came under several sources of strain. The value of trade finance fell at the peak of the crisis, but it fell by consistently smaller percentages across regions than the decline in exports in the same region. As a result, the share of bank-intermediated trade finance in world trade increased during the crisis.

31. The increased share of bank-intermediated trade finance came in spite of considerable headwinds.

  • Banks supplying trade finace shared the general increase in risk aversion observed in broader financial markets, and they restricted their supply of trade finance to certain countries or sectors and otherwise tightened credit conditions.

  • Banks also increased pricing margins driven by both increased perceptions of default risk and higher capital requirements, the latter in part due to Basel II requirements.

  • However, the impact of these factors seems to have been more than offset by a parallel increase in risk aversion by real-sector customers as these customers had become increasingly willing to pay banks to absorb risk, even at an increased cost.

  • The lower total cost of credit may also have helped to support the value of trade finance as the decline in banks’ costs of fund (e.g., LIBOR) more than offset the increased pricing margins for many banks.

IV. Other Factors in the Decline in Trade

32. The severe and synchronized collapse in world trade observed in 2008 was unprecedented, and has generated significant attention. Many researchers have posed hypotheses on the causes of this collapse (Baldwin, 2009). They do not all agree on all the points, but a consensus seems to have emerged: the great trade collapse was mostly due to a demand shock. Eaton and others (2010) have shown empirically that a collapse in trade was indeed largely due to a decline in demand for manufactures within an input-output framework with a structural gravity trade model.

A. Trade-Output Relationship

33. The demand shock was very large, but also was focused on a narrow range of goods, the production of “postpone-able” goods. During the slowdown, consumer durables and investment goods are hardest hit as consumers delayed purchases and firms shelved investment plans. Since these “postpone-able” goods typically comprise a much larger share of trade than GDP or industrial production, trade tends to fall more rapidly than output (Levchenko and others, 2009). In comparison, the decline in GDP—comprised largely of services—was contained (Borchert and Mattoo, 2009). Analogously, trade in services has fallen by less than trade in goods.

34. The surge of global supply chains (manufacturing are now geographically unbundled with various slices of the value-added process being placed in nearby nations) has led to a situation where imported parts are transformed into exported components which are then assembled into final goods to be exported again. The presence of these highly integrated and tightly synchronized production networks plays an important role in the nature of the great trade collapse (Bems et al., 2010).

35. Merchandise trade tends to fluctuate much more than proportionately to changes in national income. To estimate trade effects of downturns, Freund (2009) estimated the elasticity of trade to income. The paper also finds that the sensitivity of trade to output has been increasing in recent years, consistent with increasing globalization. Both Freund and Irwin (2002) found that the elasticity of world trade to income grew over time to about about 3½ in the 1990s. Freund (2009) also found that trade was more responsive to GDP during global downturns than in tranquil times.

B. General Financing Constraints

36. Along with the rapid decline in trade during the latter half of 2008, shortfalls in the supply of trade finance, possibly acting as a contagion, deepening, and prolonging the recession, were concerns for may of the policymakers. Trade finance has highly vulnerable in times of crisis, as was the case in East Asia in the late 1990s. Wang and Tadesse (2005) found that emerging markets that rely heavily on bank-intermediated trade finance saw a decline in trade finance by as much as 30 to 50 percent in Brazil and Argentina in 2002, by about 50 percent in Korea in 1997-98, and from USD 6 billion to USD 1 billion in Indonesia during the Asian crisis. These declines were also often associated with weak domestic banking system.

37. Access to affordable trade finance has been constrained unevenly in the recent crisis. A World Bank survey of 425 firms and 78 banks report that trade finance has been constrained in some developing regions and for smaller firms (Malouche, 2009). But the impact seems to have varied substantially across the firm size, sectoral activity, and countries’ integration into the global economy. For example, based on telephone interviews to companies exporting to Africa in the horticulture and garments sectors, Humphrey (2009) found that most of the African exporters had not (at least up to February-March 2009) experienced significant cutbacks in trade finance availability.

38. Empirical findings of the domestic “trade credit” literature also show that inter-firm transactions (i.e., finance provided at the inter-corporate level for both domestic and foreign customers) were probably constrained. Trade credit is the extension of credit by the seller to the buyer, mostly to finance domestic transactions, and is a substitute of bank loans. Empirical evidence of this literature shows that when access to credit from financial institutions is constrained during a downturn or a recession, less trade credit is extended by the seller to the buyer.9

39. Evidence from past banking crises suggests a causal link between reduced credit availability to export sectors and declining trade. Examining sectoral performance in 23 historical banking crises, Iacovone and Zavacka (2009) conclude that banking problems amplify the impact of negative demand shocks on exports, with growth slower in export-oriented sectors reliant on external finance. Amiti and Weinstein (2009) focus on the health of an exporter’s bank during the 1992–93 Japanese banking crisis and find that even within a sector, firms whose main bank was more affected by the crisis had weaker export performance. Up to a third of the Japanese export decline in 1992–93 may have been caused by the impact of the banking crisis.

40. Chauffour and Farole (2009) however cautioned against the notion of a large trade finance “gap.” They pointed out, as was shown in the earlier part of this paper, that trade finace is not down to nearly the same degree as actual trade flows. They also argue that there are two broad cases that would create a real trade finance gap: (i) there is insufficient supply (i.e., “missing markets”) or (ii) it is being supplied at prices that are temporarily too high to meet demand in the market (i.e., “overshooting markets”).

C. Financial Crises and Recessions

41. Financial crises also contribute to a drop in trade. Thomas (2009) finds that the effect of financial crisis has an additional negative effect on trade, apart from the associated contraction in output. Given that the current crisis includes both financial and real components, this could partially explain the severity of the collapse in trade.

D. Related-Party Trade

42. The pattern of the decline in trade across countries and sectors with varying shares of intra-firm trade also shed some light on the role of trade finance in the decline in trade. For example, trade between related parties should not be affected by lower access to trade finance. If subsidiaries of a multinational corporation in different countries are shipping goods between them, there should be no need for bank-intermediated trade finance to mitigate payment risk. The pattern of the trade slowdown across countries and sectors with different shares of intra-firm trade is not consistent with vulnerabilities to trade finance. If anything, there seems to be a postive correlation between the the decline in trade and the share of related-party trade of a country or sector (Table 10).

Table 10.

Related Party Shares and Trade Growth, Exports to the US

(2000 data for shares, 2009H1 for growth, in percent of value)

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Sources: Bernard, Jensen, Redding, and Schott (2008) for share, US Census for exports.

V. Official Sector Response

43. National and multilateral institutions have always supported trade finance; however the global crisis led to expansion of their activities. Many multilateral and national institutions increased their capacity for trade finance in line with the call from leaders of G20 countries for sufficient additional capacity to support $250 billion of trade over the 2009-2010 period.10 The Communiqué also appealed to national regulators to demonstrate flexibility in the national implementation of Basel II capital requirements for trade finance (G20 Leaders Summit, 2009).

A. Export Credit Agencies

44. Export credit agencies (ECA) in advanced and major emerging market countries took measures to ensure sufficient capacity to insure their exports to, and in some cases imports from developing and emerging market countries.11 According to OECD survey of ECAs in selected OECD countries (OECD, 2009), some ECAs report increase in their portfolios, with new commitments being up by about 30-50 percent. Measures included increased ceilings or capital, higher percentages of cover of the individual export transactions, enhanced support for working capital, and introduction of new products and joint efforts targeting most vulnerable groups of exporters (e.g., SMEs). Some ECAs launched consulting and advisory services, free credit assessments, and programs aimed at facilitation of regulatory environment, etc. Other ECAs enhanced their international cooperation by entering into bilateral agreements with ECAs of their major trading partners.

45. ECA coverage of trade has increased because of increased use of existing ECA programs and new program or expanded limits introduced in the context of the crisis. Data from Berne Union shows that ECAs’ share of world exports has increased from about 8 percent during 2005-2008 to slightly above 9 in 2009 (Figure 17). This one-eight increase in share is similar in magnitude to the increase in bank-intermediated trade finance and presumably reflects the same factors of increased risk aversion by non-financial firms. This suggests that ECAs may have played an important role in cushioning the downturn. They may also have played an important signaling role by reassuring the private sector that official institutions stand ready to back up at difficult times.

Figure 17.
Figure 17.

Share of World Exports of Goods Covered by Berne Union Members, short-term

(percent)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: Berne Union, WEO.

B. Multilateral Development Banks

46. MDBs acted with variety of programs and measures aimed at facilitation of trade finance.12 Indeed, the official sector reponses were well received by commercial banks (Figure 18). These programs and measures were further enhanced in the context of G-20 support of trade finance. They clearly stated the support of G-20 to MDBs in their efforts to “… leverage private capital more effectively, including through the use of guarantees, bond insurance and bridging finance.” The G-20 also supported the creation of a Global Trade Liquidity Pool (details in Appendix VI). In the context of the response to global crisis, the Trade Finance Facilitation Program of Inter-American Development Bank was enhanced from $400 million to $1 billion. The commitments to facilitate trade finance included but were not limited to: support through guarantees, lines of credit, bond instruments guaranteed by the future flows of trade, risk mitigating instruments against commercial and political risks associated with international trade in selected countries. While the increase in MDB capacity is much smaller than the increase in ECA capacity, their focus on developing economies exports as well as imports fills and important gap in the expansion of official sector trade finance capacity.

Figure 18.
Figure 18.

How do you view the official sector response?

(percent of respondents)

Citation: IMF Working Papers 2011, 016; 10.5089/9781455212507.001.A001

Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

The Response of MDBs to the Decline in Trade Finance

European Bank for Reconstruction and Development (EBRD)

In response to the global crisis in 2009, the budget of EBRD’s Trade Facilitation Program (TFP) was enhanced from €800 million to €1.5 billion to mitigate the impact of the crisis and boost trade in member countries. The EBRD’s TFP promotes foreign trade with Central and Eastern Europe and the Commonwealth of Independent States.

Asian Development Bank (ADB)

In response to the global crisis, on 31 March 2009, the ADB expanded its Trade Finance Facilitation Program (TFFP), increasing its overall exposure limit to US$1 billion from an initial US$150 million. By the end of 2009, total TFFP exposure reached over US$700 million, exceeding the US$500 million target set for 2009.

Inter-American Development Bank (IDB)

In 2009, the IDB’s Trade Finance Facilitation Program (TFFP) was enhanced from US$400 million to US$1 billion. The TFFP currently comprises a network of 198 Confirming Banks from 70 different international banking groups, and 41 Issuing Banks in 15 Latin American and Caribbean countries, with US$756 million in approved credit lines.

African Development Bank (AfDB)

In 2009, the AfDB established the Trade Finance Initiative of US$1 billion, aimed at pooling resources to help member countries cope with the global crisis.

International Finance Corporation (IFC)

In response to the global crisis, IFC has doubled its existing trade finance program to US$3 billion and worked with governments, private sector and international finance institutions to launch the Global Trade Liquidity Program (GTLP). GTLP began its operations in May 2009, with targeted commitments of US$4 billion from public sector sources. The program aims at supporting up to US$50 billion of trade in three years. The program works through global and regional banks to extend trade finance to importers and exporters in developing countries.

VI. Concluding Remarks

47. The suddenness of the drop in trade in late 2008 coupled with the recent shocks to the financial system led to concerns that a collapse in trade finance was causing broader disruptions. The parallels between the markets – lack of liquidity in markets, the role of emerging markets, and worries about counterparty risks in a changing environment – all help explain why there was so much worry initially. However, demand factors played the most important role, prompt action by the G-20 and ECAs likely eased pricing pressures, and helped keep trade flowing during the worst of the disruptions.

48. Research indicates that continuing tight financing conditions can constrain growth, hampering rebalancing according to macro factors. On the other hand, markets are unlikely to return to pre-crisis conditions anytime soon. If trade financing costs were artificially low before the crisis along with other types of short-term financing, prices will have to be higher in a sustainable equilibrium. There may also be a shift in the types of banks that provide trade finance. As was seen during 2008 and 2009, small and large banks reacted differently to the shock, and have different capacity to respond.

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Appendix I. March 2010 Survey Results

Table I.1.

Changes in Value of Trade Finance Activities: By Types of Products

(percent change)

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.2.

Change in Value of Trade Finance by Region 2008Q4 vs. 2007Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.3.

Change in Value of Trade Finance by Region 2009Q4 vs. 2008Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.4.

Change in Value of Trade Finance by Size of Bank 2008Q4 vs. 2007Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.5.

Change in Value of Trade Finance by Size of Bank 2009Q4 vs. 2008Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.6.

Change in Value of Trade Finance by Location of Global Headquarters 2008Q4 vs. 2007Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Only 1 bank is headquartered in Sub-Saharan Africa.

Only 4 banks are headquartered in Developing Asia and the Middle East and the Maghreb each.

Table I.7.

Change in Value of Trade Finance by Location of Global Headquarters 2009Q4 vs. 2007Q4

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Only 1 bank is headquartered in Sub-Saharan Africa.

Only 4 banks are headquartered in Developing Asia and the Middle East and the Maghreb each.

Table I.8.

Perceived Change in Use of Secondary Markets by Size of Bank

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.
Table I.9.

Experience with Probability of Default by Size of Bank

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, March 2010.

Appendix II. July 2009 Survey Results

Table II.1.

Summary of Respondents 1/

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, July 2009.

The total number of respondents is 88

Table II.2.

Changes in Value of Trade Finance Activities: By Types of Products

(percent change)

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Source: IMF/BAFT-IFSA Trade Finance Survey, July 2009.
Table II.3.

Changes in Merchandise Exports and Trade Finance: By Groups of Countries

(percent growth)

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Weighted average of regional changes by level of activity in respective region.

Source: IMF/BAFT-IFSA Trade Finance Survey (July 2009), Haver Analytics, IFS, WTO.
Table II.4.

Reasons for the Decline in Value of Trade Finance 1/

(percent of respondents)

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Source: IMF/BAFT-IFSA Trade Finance Survey, July 2009.

This reflects only the views of the 65 respondents that reported a decline in value of trade finance in at least one geographic region presented and that subsequently marked at least one option for the current question.