## Survey of Private Sector Trade Credit Developments

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### Background and purpose
- Conducted by the Strategy, Policy, and Review Department; approved by Reza Moghadam; dated February 27, 2009.
- Motivated by a lack of hard data on trade finance amid a startling plunge in global trade and widespread anecdotal evidence of rising cost and reduced availability of trade finance.
- Questionnaire sent to a wide list of banks (BAFT membership and FELABAN outreach); about forty responses, evenly split between advanced countries and emerging markets.
- Survey focused on identifiable bank-intermediated international trade finance in October–November 2008 versus the same period in 2007 and expectations for the next year.

### Key findings: pricing and spreads
- Pricing increases were widespread:
  - "More than 70 percent" of respondents indicated pricing of various types of letters of credit increased.
  - "Close to 90 percent" of respondents indicated pricing of both short-term and medium-term trade-related lending facilities increased.
- Reported increases in spreads over LIBOR ranged from "25 to 300 bps per annum", with some respondents reporting figures as high as "600 bps per annum" (may reflect reporting levels rather than increments).
- Identified drivers of higher pricing:
  - "80 percent" of respondents: increase in the cost of funds.
  - "60 percent" of respondents: higher capital requirements.

### Risk perceptions and counterparty criteria
- Higher counterparty risk widely reported:
  - "More than 90 percent" of advanced economy money center banks indicated a change in counterparty criteria.
  - "70 percent" of emerging market banks indicated a change in counterparty criteria.
- Tightening of lending guidelines applied to specific banks and specific countries. Countries explicitly mentioned include: Argentina, the Baltic Countries, Bolivia, Ecuador, Hungary, Iceland, Korea, Pakistan, Russia, Turkey, Ukraine, the UAE, Venezuela, and Vietnam.
- Banks reported greater focus on:
  - expanded insurance;
  - shorter maturities and stronger covenants;
  - higher cash deposits or other collateral from clients;
  - relationship deals.
- Evidence of switching from open account terms toward secured instruments (e.g., LCs) and cash-in-advance requirements.

### Volume effects and regional patterns
- Divergent volume trends between advanced-country and emerging-market banks:
  - Advanced country banks reported roughly the same number of documentary credits, guarantees and letters of credit in Oct–Nov 2008 versus Oct–Nov 2007.
  - Emerging market banks reported a "6 percent fall" in such transactions during the same period.
  - Expectations over the next year: advanced country banks expect no significant change in number of transactions; emerging market banks expect a "10 percent decrease".
- Short-term trade-related working capital lending:
  - No significant effect so far reported by both groups.
  - Expectations: advanced country banks expect no significant change; emerging market banks expect a "8 percent" drop.
- Reported reasons for volume declines (percent of banks citing):
  - "less credit availability" — "35 percent";
  - "an increase in the price of trade finance" — "18 percent";
  - "a fall in demand" — "13 percent";
  - "increased risk" — "10 percent";
  - "a fall in commodity prices" — "10 percent".
- Regional detail:
  - Intraregional trade among advanced economies appears unaffected.
  - Financing of exports to and imports from emerging and developing Asian economies has been hit; financing of imports from South Asia, Korea, and China (including Hong Kong SAR and Taiwan Province of China) reported as decreased by many respondents.
  - Advanced economy respondents indicated financing exports to Middle East and North Africa have increased ("more than 50 percent" indicated increases).
- Additional data point: SWIFT messages related to documentary credit declined "27 percent in 2008 Q4 from the same quarter of 2007" (noted as other-data context).

### Interpretation of causes and mechanisms
- Price increases explained by combined pressures:
  - increased costs of funds (e.g., very high TED spreads and elevated CDS spreads for banks);
  - higher capital requirements increasing required spreads;
  - rising default risk due to sharply lower global growth.
- Durability:
  - Cost-of-funds pressures may abate with reductions in wholesale rates.
  - Effects from higher capital requirements may be more durable and particularly acute during deleveraging; some abatement possible once a higher-capital equilibrium is reached.
- Ambiguous net impact on volumes:
  - Some exporters shifting from open account to bank trade finance instruments (LCs) as trust drops, increasing demand for bank-intermediated finance.
  - At higher risk aversion, parties may shift to cash-in-advance or low-trust arrangements, reducing bank-intermediated trade finance volumes.
- Bidirectional causality:
  - Higher cost of trade finance reduces profitability of some transactions, lowering trade and demand for finance.
  - Global slowdown reduces merchandise trade, lowering demand for trade finance.

### Bank behavior and risk management responses
- Adoption of stricter risk management practices and differentiated strategies by client type, client segment (trading, retail, commodities), and client country.
- Shorter maturities, stronger covenants, higher collateral, and relationship-focused deals emphasized.
- Increased use of trade guarantees, export credit agency support, and export insurance sought to mitigate risk.

### Policy recommendations, official-sector roles, and next steps
- Banks foresee significant roles for governments and multilateral institutions to ease conditions:
  - provide more trade guarantees;
  - increase availability of financial resources;
  - improve export insurance processes.
- Supportive programs cited as helpful (example in text): IFC's Global Trade Finance Program (GTFP).
- Regulatory suggestions from respondents:
  - review Basel II trade capital requirements;
  - discourage late payments and collusion in the trade finance market.
- Fund actions signaled:
  - consider a second, more timely survey to capture developments;
  - collect information on official sector (export credit agency and multilateral development bank) activities in cooperation with other international organizations and provide wider public information;
  - work with other public and private international organizations collecting trade finance data (World Bank country case work noted as ongoing).

*International Monetary Fund — Survey of Private Sector Trade Credit Developments (Prepared by the Strategy, Policy, and Review Department; February 27, 2009).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_022709.pdf_