TWN Info Service on Finance and Development (Mar11/05)
IMF survey of the impact of trade finance on
Geneva, 21 Mar (Andrew Cornford*) -- Trade finance contracted less than international trade following the outbreak of the financial crisis, albeit such contraction was accompanied by increases in the price of trade finance, and for many banks, the revised Basel II framework - known now as Basel III - did have a negative impact on their ability to provide trade finance.
These are among the points highlighted by the International Monetary Fund (IMF) in a new working paper.
The debate over the contribution of trade finance to the sharp downturn of international trade that followed the outbreak of the financial crisis has been accompanied by efforts to improve knowledge of a hitherto neglected subject. These efforts have received an additional fillip from the trade-finance industry's need for information to support its lobbying in favour of revision of Basel III capital requirements to better reflect the true risks of trade finance (see SUNS #7097 dated 28 February 2011).
A new working paper by the IMF appears designed to inject a cautionary note concerning how important was the influence of decreased availability of trade finance on the recent contraction of international trade (Asmundson I, Dorsey T, Khachatryan A, Niculcea I, and Saito M, "Trade and trade finance in the 2008-09 financial crisis", IMF Working Paper WP/11/16, 2011).
The paper is also of special interest because of the wide-ranging surveys of banks on which it is based and of the detailed disclosure of the surveys' results contained in the paper.
The paper's starting-point is that the decline of international trade in response to the crisis was in line with expectations based on the global decline in output. According to this view, if the decline of trade was not exceptional, there is less justification for ascribing part of the decline to a collapse of trade finance.
The survey results cited in the paper suggest that trade finance contracted less than trade, although the contraction was accompanied by widespread increases in the price of trade finance. These results also indicate that for many, but by no means all banks, Basel II - the revised form of which is now known as Basel III - did have a negative impact on their ability to provide trade finance.
Regarding the elasticity of trade with respect to output, the IMF paper draws attention to research indicating that the trade collapse in 2008-2009 reflected partly the observed increased vulnerability to fluctuations in global output of the supply chains involving more than one country by means of which the different slices of value added contributing to the gross value of much of total trade are nowadays produced. The exceptionally severe downturn in international trade also reflected the impact of the greater relative importance of postponables, such as consumer durables and investment goods in international trade, than in GDP or industrial production.
The review of trade finance in the IMF paper is based on surveys of commercial banks conducted between December 2008 and early 2010 by the IMF, the Bankers' Association for Finance and Trade (BAFT), and by BAFT-IFSA (the organisation formed by the merger of BAFT with the International Financial Services Association - IFSA).
For the purposes of these surveys, bank-intermediated trade finance is defined as letters of credit, export credit insurance, and trade-related lending. However, the paper acknowledges that the data on the scale of the different forms of trade finance have shortcomings. These shortcomings reflect the fact that not all lending associated with international trade is carried out by units within banks specialising in trade finance, as well as the difficulty of distinguishing the trade component of much corporate lending by other parts of banks.
The principal finding of the surveys was that general contraction of trade finance in 2008 and the first half of 2009 was significantly less than that of exports, and that this outcome was mostly also true at the regional level. Between the fourth quarters of 2007 and 2008, goods exports declined by 10.3 per cent and trade finance (estimated as a weighted average of regional changes) by 1.9 per cent; and between the fourth quarter of 2008 and the second quarter of 2009, goods exports declined by 14.7 per cent and trade finance by 7.5 per cent.
During the first of these two periods, there were
actually small increases in the value of the exports of lower-income
Asian countries - accompanied nonetheless by a contraction of 5.5 per
cent in trade finance - and of the Middle East and the
During the second period - with the same two exceptions (lower-income Asian countries and the Middle East and Maghreb region) - the declines in both goods exports and in trade finance were significantly larger, ranging in the case of goods exports from 10.4 per cent for Latin America to 30.6 per cent for Southeast Europe and Central Asia, and in the case of trade finance, from no change for Emerging Asia (including China and India) to 13.7 per cent for Latin America. The recovery in goods trade later in 2009 outstripped that of trade finance.
Among banks that changed the terms of their trade-related lending between the fourth quarters of 2008 and 2009, 53 reported a tightening and six a loosening of the terms. The prevalence of tightening as opposed to loosening was accompanied by widespread but far-from-universal increases in the pricing margin for trade finance over banks' cost of funds.
During the three periods, 2008, the first half of 2009 (the period when the crisis was at its worst), and the whole of 2009, the proportion of banks decreasing their pricing margins was substantially less than that of banks which either increased their pricing margins or kept them unchanged. Increases in pricing margins were at their most prevalent in 2009. However, there was considerable variation in the changes of pricing margins according to bank size and to different trade-finance products.
Various reasons were given by banks for the increases in pricing margins. For 2008, 36 per cent of banks cited the increased risk of trade-finance products compared to other working-capital lending to the same non-financial corporate borrowers, and for 2009, the figure increased to 42 per cent. For 2008, 34 per cent of banks also cited increased capital requirements as a reason for the increases in margins, and for 2009, 42 per cent of banks.
Among banks reporting increases in the price of trade-finance products for 2008, 22 per cent reported that the rules of Basel II for credit risk had exercised a negative impact on their ability to provide trade finance, and for the first half of 2009, the proportion was 35 per cent. The percentages differed markedly for banks of different sizes, with small banks reporting no impact from Basel II but substantial proportions of large banks reporting a negative impact (29 per cent for 2008 and 53 per cent for the first half of 2009).
In 2008, the value of trade finance provided decreased for 42 per cent of responding banks but increased for 51 per cent. In the first half of 2009, the proportions were reversed: 61 per cent of banks reported decreases in the value of trade finance, and 28 per cent reported increases. For the latter period, the proportion of banks reporting decreases also exceeded that of banks reporting increases for all sizes of banks and for all regions.
The dominant influences cited by banks for both the rises and the declines in the value of trade finance were fluctuations in demand and in the prices of goods traded. Thus, in the most recent of the IMF/BAFT-IFSA surveys, in the case of banks reporting an increase in the value of trade finance, 72 per cent cited among their reasons an increase in the demand for trade-finance activities, and 34 per cent, an increase in the prices of goods traded.
Of banks reporting a decrease in the value of trade finance, 85 per cent cited among their reasons a fall in the demand for trade-finance activities, and 38 per cent a fall in the prices of goods traded. Credit availability was most important for large banks, 40 per cent among such banks that reported a decline in the value of trade finance citing less credit availability internally and 48 per cent citing less credit availability at counter-party banks.
The IMF paper acknowledges that the changes in levels of trade finance indicated by the IMF/BAFT-IFSA surveys reflect the interaction of demand and supply. The data on pricing and terms mentioned earlier point to increased caution on the part of banks regarding trade finance. However, the effect of this increase was offset by a corresponding increase in risk aversion on the part of exporters, which led to increased recourse to risk-reducing forms of trade finance such as letters of credit. The net result (which is in line with the findings of other surveys) was an actual rise in the proportion of trade supported by bank-intermediated finance during the crisis.
Although the focus of attention and the samples of banks in the surveys of IMF/BAFT-IFSA, on the one hand, and in those recently conducted by the International Chamber of Commerce (ICC), on the other, are not the same, the results are in fact similar where responses to similar questions are involved. Notably, both indicate sharp contractions of trade finance in early 2009.
The conclusions of the IMF paper differ most clearly from those of other institutions with respect to expectations as to the elasticity of international trade in relation to GDP. Resolution or narrowing of disagreements here will depend on further analysis of global supply chains and the corresponding breakdown of trade's gross value by value added in different countries, and of the relation of these developments to trade finance.
Such analysis will entail greater attention to issues whose importance has always been recognised in the practice of international trade, while until recently attracting only marginal attention in policy discussion and academic economics.
(* Andrew Cornford, a former UNCTAD economist and now with the Observatoire de la Finance, contributed this article to the SUNS.) +