## _wp1116

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### Executive Summary — Key findings on trade and trade finance during 2008–09
- Global merchandise trade sharply declined in late 2008 and early 2009.  
- Bank-intermediated trade finance fell in value during the crisis, but by less than merchandise trade; as a result, the share of world trade supported by bank-intermediated trade finance increased despite higher pricing margins.  
- Pricing of trade finance products rose significantly for many banks during the crisis, although these pricing increases do not stand out from those for other commercial bank products; wide diversity in pricing responses across banks and many banks did not increase trade finance pricing.  
- IMF and other bank surveys found increased pricing and tightened credit limits on trade finance, but also a willingness of banks to lend to support international trade for most (but not all) clients.  
- Factors other than trade finance were more important in the decline in trade, although increased pricing and tightened credit conditions discouraged some transactions:
  - The decline in merchandise trade aligns with historical relationships between changes in trade and changes in output.
  - Sectoral patterns do not suggest sectors more dependent on bank-intermediated trade finance were disproportionately affected.

### Scope and definitions
- Focus: short-term trade finance arrangements in which the banking system provides lending, insurance against nonpayment, or both in support of international trade.  
- Trade finance spectrum described:
  - Open account: largest share of global merchandise trade; importers repay exporters directly after receipt of goods without insurance or lending from third parties.
  - Cash-in-advance: importers pay before shipment.
  - Bank-intermediated trade finance: allows importers or exporters to shift some nonpayment/non-performance risk to banks or obtain bank financing so exporters receive payment earlier.
  - Public sector entities (ECAs) and MDB programs have overlapping roles, including secondary guarantees or liquidity to banks.

### Evidence sources and methodology
- IMF staff and BAFT (now BAFT-IFSA) conducted four surveys of banks on trade finance between December 2008 and March 2010 covering 2007Q4 through 2009Q4; a fifth survey in late 2010 is noted but not reflected in this paper.
- Discussions with commercial banks, ECAs, and market participants supplemented survey evidence.

### Trade and financial context (selected quantitative points)
- Commodity price shocks pre-crisis: wheat prices doubled; rice prices almost tripled; fuel prices in 2007 rose around 50 percent.
- LIBOR dynamics: LIBOR rates rose by roughly one full percentage point immediately after Lehman; policy responses brought LIBOR down to pre-Lehman levels within a few weeks and by more than three percentage points from pre-Lehman levels by 2009 Q2.
- Loans to non-financial firms: dropped by 14 and 1 percent in the U.S. and the Euro area respectively between 2008Q4 and 2009Q3.
- U.S. commercial paper volumes: fell by 22 and 40 percent for financial and non-financial issuers respectively between 2008Q4 and 2009Q3.

---

### Overview: bank-intermediated trade finance during the crisis
- Bank-intermediated trade finance was affected but largely held up during the crisis; banks became more cautious and pricing margins often increased.
- Exporters increased risk aversion and attempted to shift transaction risk to banks; the share of world trade supported by bank-intermediated trade finance appears to have increased.
- Survey participation and respondent profile:
  - The total number of respondents to the fourth survey is 100.
  - The average bank responding is active in trade finance in three major regions and has branches in two regions.

### Value and trajectories of trade finance (survey-based)
- 2008Q4 vs. 2007Q4 (July 2009 Survey aggregate): Goods Exports -10.3 percent; Trade Finance +3.4 percent.
- 2009Q4 vs. 2008Q4 (March 2010 Survey aggregate reported in charts): Goods Exports -1.9 percent; Trade Finance -7.5 percent.
- During the most intense period (January 2009 vs. October 2008), trade finance declined in value by amounts on the order of 10 percent, while merchandise trade fell much more sharply.
- In almost all regions and periods through 2009 Q2 the decline in trade finance value was smaller than in merchandise trade, or trade finance value rose even while exports were falling.
- During the crisis banks estimated that open account transactions fell below the level of bank-supported trade finance in 2009 Q2.

### Reasons for changes in trade finance value (survey responses)
- Demand factors dominated banks' explanations:
  - A fall in the demand for trade activities was cited by All banks 85 percent (among those reporting a decline).
  - A fall in the price of transactions (e.g., commodity prices) was cited by All banks 38 percent.
  - Less credit availability at your own institution: All banks 30 percent.
  - Less credit availability at your counterparty banks: All banks 30 percent.
  - A shift towards open account transactions: All banks 23 percent.
- By bank size (reasons for decline; percent among those reporting a decline):
  - Small banks: fall in demand 81; fall in price 25; less credit at own institution 19; less credit at counterparty banks 6; shift to open account 19.
  - Medium banks: fall in demand 90; fall in price 24; less credit at own institution 24; less credit at counterparty banks 24; shift to open account 33.
  - Large banks: fall in demand 80; fall in price 56; less credit at own institution 40; less credit at counterparty banks 48; shift to open account 16.
- Reasons for increases (percent among those reporting an increase):
  - An increase in the demand for trade activities: All banks 72 (Small 73; Medium 77; Large 66).
  - An increase in the price of transactions: All banks 34.
  - More credit availability at your own institution: All banks 30.
  - A shift away from open account transactions: All banks 28 (Large banks 41).
  - A shift away from cash-in-advance transactions: All banks 22 (Small banks 35; Medium banks 5; Large banks 24).

### Ability to meet demand (April/March 2010 survey)
- Have you been able to satisfy all of your customer needs?
  - All banks: Yes 69 percent; No 31 percent.
  - Small banks: Yes 75 percent.
  - Medium banks: Yes 73 percent.
  - Large banks: Yes 59 percent.

---

### Secondary markets and trade-finance receivables
- Secondary market volumes for asset-backed securities fell by more than three quarters between mid-2007 peak levels and 2010 Q1.
- Secondary market spreads rose much more than lending spreads in general, with spreads on asset-backed securities rising more than ten-fold to peak at nearly 1000 basis points.
- Secondary markets in trade-finance receivables did not appear to be significantly affected by the crisis per survey evidence:
  - Most banks reported no change in use of secondary markets in both 2008 Q4 and 2009 Q4 versus the same period a year earlier.
  - Nearly twice as many banks reported increased use of secondary markets as reported decreased use.

---

### Bank pricing and credit conditions for trade finance
- Survey evidence consistent with a demand-driven story: the decline in trade finance played no more than a modest role in the decline in merchandise trade.
- Pricing dynamics:
  - Average pricing margins for trade finance rose during the crisis, but less than half of banks increased pricing in any single period.
  - More banks increased pricing than decreased pricing relative to banks’ costs of funds.
  - A majority of banks either held pricing steady or reduced pricing in the periods 2007 Q4 to 2008 Q4, 2008 Q4 to 2009 Q2, and 2008 Q4 to 2009 Q4.
  - Large banks were much more likely to increase pricing and by larger average amounts; large banks account for a substantial majority of trade finance, so average pricing margins for trade finance as a whole almost certainly increased.
  - Pricing pressures eased in 2009 as the difference in the share of banks reporting increases versus decreases in pricing fell sharply.
  - Average increases in pricing were moderate for most banks reporting increases, particularly in 2009.

- Exact survey highlights (percent of respondents; mean and median changes are percentage changes in the pricing margin above bank cost of funds):
  - Table 7a. Pricing Changes by Size of Bank, 2008Q4 vs. 2007Q4 (Average across products): Increased 38; No change 51; Decreased 10; Mean change 31; Median change 0.
    - Large banks (Average across products): Increased 70 (Letters of credit Increased 70; No change 24; Decreased 6; Mean change 50; Median change 50).
    - Small banks (Average across products): Increased 29; No change 56; Decreased 15; Mean change 35; Median change 0.
  - Table 7b. 2009Q2 vs. 2008Q4 (Average across products): Increased 44; No change 40; Decreased 16; Mean change 23; Median change 0.
    - Large banks (Average across products): Increased 53; No change 35; Decreased 12; Mean change 35; Median change 7.
  - Table 7c. 2009Q4 vs. 2008Q4 (Average across products): Increased 40; No change 36; Decreased 25; Mean change 6; Median change 0.
    - Medium banks (Average across products): Increased 34; No change 52; Decreased 14; Mean change -4; Median change 0.
    - Large banks (Average across products): Increased 38; No change 25; Decreased 36; Mean change 16; Median change 0.

- Factors affecting pricing by bank size (Table 8; percent reporting this reason among those reporting price increases):
  - Own institution's increased cost of funds: All banks 57; Small banks 45; Medium banks 44; Large banks 72.
  - Increased risk of trade finance products relative to other working capital lending: All banks 36; Small banks 30; Medium banks 28; Large banks 45.
  - Increased capital requirements: All banks 34; Small banks 20; Medium banks 28; Large banks 48.
  - Other reasons: All banks 18; Small banks 25; Medium banks 17; Large banks 14.

- Impact of Basel II on ability to provide trade finance (Table 9; percent among those reporting price increases due to increased capital requirements and answering this question):
  - 2008Q4 vs. 2007Q4: Not applicable All banks 17; No impact All banks 52; Positive impact All banks 9; Negative impact All banks 22.
  - 2009Q4 vs. 2008Q4: Not applicable All banks 0; No impact All banks 80; Positive impact All banks 9; Negative impact All banks 2.
  - Large banks were more likely to report Basel II having a negative impact relative to small and medium banks.

- Default risk perceptions:
  - Probability of default decreased over course of 2009.
  - Net only 13 percent reported an increase in default risk in 2009 versus a net of 30 percent between 2007 Q4 and 2008 Q4.
  - Among July 2009 respondents who had increased prices, 47 percent identified default risk as a significant force in higher margins; 52 percent cited increased cost of funds.

- Interpretation:
  - Increased pricing margins may be persistent regardless of defaults and Basel II/III developments.
  - Market view: pre-crisis trade finance pricing margins were artificially low; trade finance often a “loss-leader” to maintain client relationships with insufficient capital behind risk.
  - In equilibrium, prices may have to be higher; the level at which they should settle is unclear.

---

### Summary of survey results — headwinds and offsets
- Headwinds:
  - Banks increased risk aversion, restricted supply to certain countries or sectors, and tightened credit conditions.
  - Banks increased pricing margins driven by increased perceptions of default risk and higher capital requirements (partly due to Basel II).
- Offsets:
  - Real-sector customers increased risk aversion and were willing to pay banks to absorb risk even at increased cost.
  - Decline in banks’ costs of funds (e.g., LIBOR) lowered total cost of credit and in many cases more than offset increased pricing margins.
- Net outcome: Bank-intermediated trade finance largely held up; value fell at the peak but by smaller percentages than exports, raising the share of bank-intermediated trade finance in world trade.

---

### Other factors in the decline in trade
- Trade-output relationship:
  - The collapse was mostly due to a demand shock concentrated on “postpone-able” goods (consumer durables and investment goods).
  - Postpone-able goods comprise a much larger share of trade than GDP or industrial production; elasticity of trade to income grew to about about 3½ in the 1990s.
  - Global supply chains amplified the collapse.
- General financing constraints:
  - Historical crises show large declines in trade finance (examples: Brazil and Argentina 30–50 percent in 2002; Korea about 50 percent in 1997–98; Indonesia USD 6 billion to USD 1 billion during Asian crisis).
  - World Bank survey found constraints in some developing regions and for smaller firms.
  - Banking problems can amplify negative demand shocks on exports (Iacovone and Zavacka, Amiti and Weinstein findings cited).

---

### Trade finance “gap” and official-sector response
- Chauffour and Farole (2009) caution against the notion of a large trade finance “gap”; two cases would create a real gap: (i) insufficient supply; (ii) supply at prices temporarily too high to meet demand.
- Empirical observation: trade finance is not down to nearly the same degree as actual trade flows.
- Related-party (intra-firm) trade likely less affected by trade finance access; observed patterns are not consistent with vulnerabilities uniquely due to trade finance.
- Official-sector actions:
  - G20 called for sufficient additional capacity to support $250 billion of trade over 2009–2010 and urged flexibility in Basel II implementation for trade finance.
  - ECAs increased capacity and support; OECD survey: new commitments up by about 30–50 percent for some ECAs.
  - Berne Union: ECAs’ share of world exports increased from about 8 percent (2005–2008) to slightly above 9 in 2009.
- MDBs expanded trade finance programs (selected MDB responses):
  - EBRD TFP: enhanced from €800 million to €1.5 billion in 2009.
  - ADB TFFP: exposure limit expanded to US$1 billion from US$150 million on 31 March 2009; by end-2009 total TFFP exposure reached over US$700 million.
  - IDB TFFP: enhanced from US$400 million to US$1 billion in 2009; US$756 million in approved credit lines.
  - AfDB: established the Trade Finance Initiative of US$1 billion in 2009.
  - IFC: doubled trade finance program to US$3 billion; helped launch GTLP with targeted commitments of US$4 billion and aims at supporting up to US$50 billion of trade in three years.
- Market perception: official measures were generally well received by commercial banks and likely helped cushion downturn and signal reassurance.

---

### Longer-run implications and policy considerations
- Research indicates continuing tight financing conditions can constrain growth and hamper rebalancing; markets unlikely to return to pre-crisis conditions soon.
- If pre-crisis trade financing costs were artificially low, sustainable equilibrium pricing will be higher.
- Anticipate structural change in supplier base for trade finance; heterogeneous responses across small and large banks.
- Policy implications highlighted by survey evidence:
  - Monitor demand-side falls: 86 percent of respondents cited a fall in demand for trade activities (Table II.4).
  - Where guidelines tightened, requests increased: more collaterals (71 percent), more Export Credit Insurance (41 percent), shorter tenors (65 percent), stronger covenants (53 percent).
  - Clarify regulatory frameworks (Basel II effects flagged) to avoid unintended retrenchment in trade finance provision.

---

### Appendix III — Trade finance supply and demand factors (key points)
- Channels: trade finance is affected by banks’ cost of funds and the amount of capital required to back transaction risk; pricing is a margin above bank cost of funds driven by capital needs.
- Bank supply constraints: determined by banks’ own capital assessments and regulatory minimum capital requirements; during the crisis banks required increasing capital to back risk.
- Demand dynamics: importer/exporter risk aversion and opportunity costs of working capital; in the crisis many firms were willing to pay for bank-intermediated trade finance despite higher pricing.
- Forms and market shares (IMF staff estimates and surveys; Figure IV.1):
  - Open Account: 38% - 45%, $6.0 - $7.2 trillion
  - Intra-Firm: $3 - $3.5 trillion
  - Bank Trade Finance: $5.5-$6.4 trillion
  - ECA / Arm's-Length Guaranteed / Non-Guaranteed: $1.25-1.5 trillion
  - Total benchmark: $15.9 trillion in global merchandise trade (2008 IMF estimate)
- Bank-intermediated instruments include letters of credit (unconfirmed/confirmed), export-related working capital, forfaiting, factoring, documentary collections, and secondary markets for trade finance exposures.

*Source: _wp1116 - Executive Summary, survey results, appendices and chapter excerpts (IMF).*

### Executive Summary ......................................................................................................

### Executive Summary

### Key findings on trade and trade finance during 2008–09
- Global merchandise trade sharply declined in late 2008 and early 2009.  
- 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.  
- Pricing of trade finance products rose significantly for many banks during the crisis, although these pricing increases do not stand out from those for other commercial bank products. There was a wide diversity in pricing responses across banks and many banks did not increase trade finance pricing.  
- Surveys of commercial banks by the IMF and others found an increase in pricing and a tightening of credit limits on trade finance during the crisis, but also a willingness of banks to lend to support international trade for most (but not all) clients.  
- Factors other than trade finance appear to have been more important in the decline in trade, although increased pricing and tightened credit conditions discouraged some trade transactions that might otherwise have taken place.  
  - The decline in merchandise trade is in line with historical relationships between changes in trade and changes in output.  
  - The sectoral pattern of the drop in merchandise trade does not suggest that sectors traditionally more dependent on bank-intermediated trade finance were more affected than those that make little use of it.

### Scope and definitions
- Focus: short-term trade finance arrangements in which the banking system provides lending, insurance against nonpayment, or both in support of international trade.  
- Trade finance spectrum described:
  - Open account: largest share of global merchandise trade; importers repay exporters directly after receipt of goods without insurance or lending from third parties; exporters supply working capital and assume non-payment risk.  
  - Cash-in-advance: importers pay before shipment; non-performance risk and working capital burden rest with the importer.  
  - Bank-intermediated trade finance: allows importers or exporters to shift some nonpayment/non-performance risk to banks or obtain bank financing so exporters receive payment earlier; insurers and other non-bank financial institutions participate similarly.  
  - Public sector entities (ECAs) and MDB programs have overlapping roles, including secondary guarantees or liquidity to banks.

### Evidence sources and methodology
- Assessment complicated by absence of organized markets for bank-intermediated trade finance and proprietary bank customer information.  
- To fill the information gap, IMF staff and the Bankers' Association for Finance and Trade (BAFT, now BAFT-IFSA) conducted four surveys of banks on trade finance between December 2008 and March 2010 covering developments from 2007Q4 through 2009Q4. A fifth survey in late 2010 is noted but not reflected in this paper.  
- Discussions with commercial banks, ECAs, and market participants supplemented survey evidence.

### Trade developments and context (selected quantitative points)
- Commodity price shocks prior to the financial crisis: wheat prices doubled and rice prices almost tripled; fuel prices in 2007 rose around 50 percent.  
- The bankruptcy of Lehman Brothers in September 2008 exacerbated counterparty risk concerns and caused short-term funding costs to spike. Policy rates of major central banks responded quickly and brought LIBOR rates down:
  - LIBOR rates rose by roughly one full percentage point immediately after Lehman.  
  - Policy responses brought LIBOR 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.  
- International trade experienced a sharp, globally synchronized fall in the second half of 2008 and early 2009; exports of advanced, emerging, and developing economies all dropped sharply after mid-2008 and stabilized in early/mid-2009, with sharp recoveries in late 2009/early 2010 for most major economies, though trade remained much lower in early 2010 than at the mid-2008 peak.

### Financial market disruptions and transmission to trade finance (selected quantitative points)
- The impact of increased cost of funds was uneven across advanced and emerging markets and across banks/non-banks:
  - Emerging market spreads rose by a much larger margin and fell more gradually than advanced economy spreads and were still above pre-Lehman levels in 2010Q1.  
- The disruption to lending varied by instrument and borrower:
  - Loans to non-financial firms dropped by 14 and 1 percent in the U.S. and the Euro area respectively between 2008Q4 and 2009Q3.  
  - U.S. commercial paper volumes fell by 22 and 40 percent for financial and non-financial issuers respectively between 2008Q4 and 2009Q3, reflecting widespread lack of trust in securitized debt.

### Conclusions drawn in the Executive Summary
- Shocks to trade finance were not the major factor in the decline in trade during 2008–09.  
- Increased pricing and tightened credit conditions in trade finance played a role and discouraged some transactions, but broader trade declines are largely attributable to general demand/output declines and other factors documented in the paper.  

*Source: _wp1116 - Executive Summary (IMF), pages 4–12 — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1116.pdf*

### 14.      Secondary markets, in which financial assets are resold by the original lender, were

### _wp1116 - 14.      Secondary markets, in which financial assets are resold by the original lender, were

### Secondary markets: volumes and spreads
- Secondary market volumes for asset-backed securities fell by more than three quarters between mid-2007 peak levels and 2010 Q1.
- Secondary market spreads rose much more than lending spreads in general, with spreads on asset-backed securities rising more than ten-fold to peak at nearly 1000 basis points.

### Overview: bank-intermediated trade finance during the crisis
- Bank-intermediated trade finance was affected but largely held up during the crisis.
- Banks became increasingly cautious with real-sector customers and counterparty banks; pricing margins often increased.
- Exporters increased risk aversion, attempting to shift transaction risk to banks; as a consequence, the share of world trade supported by bank-intermediated trade finance appears to have increased during the crisis.
- IMF staff, BAFT-IFSA, and other organizations conducted four surveys of commercial banks between December 2008 and early 2010 to fill information gaps on commercial bank trade finance.
- The total number of respondents to the fourth survey is 100.
- The average bank responding to the survey is active in trade finance in three major regions and has branches in two regions.

### Value and trajectories of trade finance
- The value of trade covered by bank-intermediated trade finance held roughly even or rose during the first phase of the crisis (2008 Q4 vs. 2007 Q4) even as the value of trade fell sharply.
- During the most intense period (January 2009 vs. October 2008), trade finance declined in value by amounts on the order of 10 percent, while the value of merchandise trade fell much more sharply in the same period.
- In almost all regions and periods through 2009 Q2 the decline in the value of trade finance was smaller than in merchandise trade, or trade finance value rose even while exports were falling.
- By 2009 Q4 there were signs of recovery in trade; in most regions recovery in merchandise trade outstripped growth in trade finance value.

Key reported regional aggregate changes (survey-based)
- Overall change in goods exports and trade finance (selected aggregate points from surveys):
  - 2008Q4 vs. 2007Q4: Goods Exports -10.3 percent; Trade Finance +3.4 percent (July 2009 Survey aggregate).
  - 2009Q4 vs. 2008Q4: Goods Exports -1.9 percent; Trade Finance -7.5 percent (March 2010 Survey aggregate reported in charts).
- During the crisis banks estimated that open account transactions fell below the level of bank-supported trade finance in the second quarter of 2009.

### Reasons for changes in the value of trade finance (survey results)
- Demand factors dominated banks' explanations for both declines and increases in trade finance value.
  - The change in the value of trade was cited as by far the most important factor.
  - Rise or fall in commodity prices was the second most-cited factor.
- Supply-side factors cited by significant minorities included:
  - Less/more credit availability at own institution.
  - Less/more credit availability at counterparty banks.
  - Shifts to or from open account or cash-in-advance transactions.
- Differences by bank size:
  - Credit availability factors were relatively more important at large banks, reflecting greater deleveraging needs.

Selected tabulated responses (percent of respondents)
- Reasons for the decline in value of trade finance (Table 3; percent of respondents among those reporting a decline):
  - A fall in the demand for trade activities: All banks 85; Small banks 81; Medium banks 90; Large banks 80.
  - A fall in the price of transactions (e.g., commodity prices): All banks 38; Small banks 25; Medium banks 24; Large banks 56.
  - Less credit availability at your own institution: All banks 30; Small banks 19; Medium banks 24; Large banks 40.
  - Less credit availability at your counterparty banks: All banks 30; Small banks 6; Medium banks 24; Large banks 48.
  - A shift towards open account transactions: All banks 23; Small banks 19; Medium banks 33; Large banks 16.
- Reasons for the increase in value of trade finance (Table 4; percent of respondents among those reporting an increase):
  - An increase in the demand for trade activities: All banks 72; Small banks 73; Medium banks 77; Large banks 66.
  - An increase in the price of transactions (e.g., commodity prices): All banks 34; Small banks 31; Medium banks 36; Large banks 34.
  - More credit availability at your own institution: All banks 30; Small banks 31; Medium banks 27; Large banks 31.
  - A shift away from open account transactions: All banks 28; Small banks 19; Medium banks 18; Large banks 41.
  - A shift away from cash-in-advance transactions: All banks 22; Small banks 35; Medium banks 5; Large banks 24.

### Risk management, lending guidelines, and bank behavior
- Banks adopted stricter risk management practices in response to higher risks:
  - Greater differentiation by individual clients, client business segment, and home country.
  - Expanded insurance, shorter maturities, stronger covenants, and higher cash deposits or other collateral from clients.
- Reported changes in trade-related lending guidelines (Table 5; percent of respondents among those reporting tightening):
  - Become more cautious with certain sectors: All banks 74.
  - Become more cautious with certain countries: All banks 77.
  - Requested more collaterals (including equity contributions and cash deposits): All banks 62.
  - Requested shorter tenors: All banks 58.
  - Requested stronger covenants: All banks 47.
  - Faced more regulatory controls: All banks 43.
  - Requested more DC or LC (including standby and confirmed LC): All banks 42.
  - Requested more Export Credit Insurance: All banks 28.
- A small number of banks reported loosening of standards; among those, the same factors (sectors, countries, collateral, tenors, covenants) were cited in reverse.

Survey findings on ability to meet demand
- Have you been able to satisfy all of your customer needs? (April/March 2010 survey)
  - All banks: Yes 69 percent; No 31 percent.
  - By bank size: Small banks Yes 75 percent; Medium banks Yes 73 percent; Large banks Yes 59 percent.
  - A substantial minority of large banks indicated they could not satisfy all customer needs, consistent with greater credit availability concerns at large banks.

### Additional observational points
- Merchandise trade fell sharply and at a much faster rate than GDP during the 2008-09 crisis; this pattern is typical in downturns and declines in 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.
- SWIFT message analysis by ICC provided corroborating evidence of increased risk aversion (e.g., refusals to honor letters of credit because of document discrepancies), though SWIFT counts messages and do not measure transaction values.

*Source: IMF/BAFT-IFSA Trade Finance Surveys (December 2008–March 2010) and accompanying analysis in the provided chapter text.*

### 23.      Secondary markets in trade-finance receivables do not appear to have been

### _wp1116 - 23.      Secondary markets in trade-finance receivables do not appear to have been

### Secondary markets in trade-finance receivables
- Survey evidence indicates secondary markets in trade-finance receivables did not appear to be significantly affected by the crisis.
- Most banks reported no change in use of secondary markets in both 2008 Q4 and 2009 Q4 versus the same period a year earlier.
- Nearly twice as many banks reported increased use of secondary markets as reported decreased use (Figure 13).
- Responses on use of secondary markets were broadly similar across banks of different sizes (Appendix I, Table I.8; Appendix II, Table II.16).

### D. Bank Pricing and Credit Conditions for Trade Finance
- Survey evidence is consistent with a demand-driven story: decline in trade finance played no more than a modest role in decline in merchandise trade.
- Survey results indicate some increased pricing for trade finance relative to banks’ cost of funds (Figures 2 and 3), which would reduce bank-intermediated trade finance other things equal.  
- The increased share of bank-intermediated trade finance despite increased pricing suggests exporter risk aversion dominated.

Findings on pricing dynamics:
- Average pricing margins for trade finance rose during the crisis, but less than half of banks increased pricing in any single period.
- More banks increased pricing than decreased pricing relative to banks’ costs of funds.
- A majority of banks either held pricing steady or reduced pricing in the periods 2007 Q4 to 2008 Q4, 2008 Q4 to 2009 Q2, and 2008 Q4 to 2009 Q4.
- Large banks were much more likely to increase pricing and by larger average amounts than indicated by unweighted averages; because large banks account for a substantial majority of trade finance, average pricing margins for trade finance as a whole almost certainly increased.
- Pricing pressures eased in 2009 as the difference in the share of banks reporting increases versus decreases in pricing fell sharply (Figure 14).
- Average increases in pricing were moderate for most banks reporting increases, particularly in 2009 (Figure 15).

Exact survey table highlights (percent of respondents; mean and median changes are percentage changes in the pricing margin above bank cost of funds):
- Table 7a. Pricing Changes by Size of Bank, 2008Q4 vs. 2007Q4:
  - Letters of credit: Increased 38; No change 52; Decreased 10; Mean change 31; Median change 0.
  - Export credit insurance: Increased 29; No change 62; Decreased 9; Mean change 14; Median change 0.
  - Trade-related lending: Increased 48; No change 40; Decreased 13; Mean change 48; Median change 0.
  - Average across products: Increased 38; No change 51; Decreased 10; Mean change 31; Median change 0.
  - By size (Large banks): Letters of credit Increased 70; No change 24; Decreased 6; Mean change 50; Median change 50.
  - By size (Small banks): Average across products Increased 29; No change 56; Decreased 15; Mean change 35; Median change 0.

- Table 7b. Pricing Changes by Size of Bank, 2009Q2 vs. 2008Q4:
  - Letters of credit: Increased 46; No change 36; Decreased 18; Mean change 23; Median change 0.
  - Export credit insurance: Increased 41; No change 50; Decreased 9; Mean change 19; Median change 0.
  - Trade-related lending: Increased 45; No change 35; Decreased 20; Mean change 28; Median change 0.
  - Average across products: Increased 44; No change 40; Decreased 16; Mean change 23; Median change 0.
  - By size (Large banks): Average across products Increased 53; No change 35; Decreased 12; Mean change 35; Median change 7.

- Table 7c. Pricing Changes by Size of Bank, 2009Q4 vs. 2008Q4:
  - Letters of credit: Increased 40; No change 36; Decreased 23; Mean change 6; Median change 0.
  - Export credit insurance: Increased 32; No change 49; Decreased 20; Mean change 3; Median change 0.
  - Trade-related lending: Increased 47; No change 23; Decreased 31; Mean change 11; Median change 0.
  - Average across products: Increased 40; No change 36; Decreased 25; Mean change 6; Median change 0.
  - By size (Medium banks): Average across products Increased 34; No change 52; Decreased 14; Mean change -4; Median change 0.
  - By size (Large banks): Average across products Increased 38; No change 25; Decreased 36; Mean change 16; Median change 0.

Factors affecting pricing by bank size (Table 8; percent of respondents reporting this reason among those reporting price increases):
- Own institution's increased cost of funds: All banks 57; Small banks 45; Medium banks 44; Large banks 72.
- Increased risk of trade finance products relative to other working capital lending: All banks 36; Small banks 30; Medium banks 28; Large banks 45.
- Increased capital requirements: All banks 34; Small banks 20; Medium banks 28; Large banks 48.
- Other: All banks 18; Small banks 25; Medium banks 17; Large banks 14.

Impact of Basel II on ability to provide trade finance (Table 9; percent of respondents among those reporting price increases due to increased capital requirements and answering this question):
- 2008Q4 vs. 2007Q4:
  - Not applicable (incl. Basel II has not been implemented) All banks 17.
  - No impact All banks 52.
  - Positive impact All banks 9.
  - Negative impact All banks 22.
- 2009Q4 vs. 2008Q4:
  - Not applicable All banks 0.
  - No impact All banks 80.
  - Positive impact All banks 9.
  - Negative impact All banks 2.
- Large banks were more likely to report Basel II having a negative impact on ability to provide trade finance relative to small and medium banks.

Default risk perceptions:
- Probability of default decreased over course of 2009 (Figure 16).
- Majority of respondents indicated no change in defaults; net only 13 percent reported an increase in default risk in 2009 against a net of 30 percent between 2007 Q4 and 2008 Q4.
- Among respondents in July 2009 who had increased prices, 47 percent identified default risk as a significant force in higher margins; 52 percent cited increased cost of funds as a leading reason.

Interpretation and outlook:
- Increased pricing margins may be persistent regardless of defaults and Basel II/III developments.
- Market view: pre-crisis trade finance pricing margins were artificially low; trade finance often a “loss-leader” to maintain client relationships with insufficient capital behind risk.
- In equilibrium, prices may have to be higher; level at which they should settle is unclear.

### E. Summary of Survey Results
- Bank-intermediated trade finance largely held up during the crisis despite several sources of strain.
- Value of trade finance fell at the peak of the crisis, but by consistently smaller percentages across regions than the decline in exports in the same region.
- As a result, share of bank-intermediated trade finance in world trade increased during the crisis.

Key headwinds and offsets:
- Headwinds:
  - Banks shared general increase in risk aversion and restricted supply of trade finance to certain countries or sectors and tightened credit conditions.
  - Banks increased pricing margins driven by increased perceptions of default risk and higher capital requirements (partly due to Basel II).
- Offsets:
  - Parallel increase in risk aversion by real-sector customers who were increasingly willing to pay banks to absorb risk, even at increased cost.
  - Decline in banks’ costs of funds (e.g., LIBOR) lowered total cost of credit and in many cases more than offset increased pricing margins.

### IV. OTHER FACTORS IN THE DECLINE IN TRADE

A. Trade-Output Relationship
- Consensus: the great trade collapse was mostly due to a demand shock.
- Eaton and others (2010): collapse largely due to decline in demand for manufactures within an input-output structural gravity trade model.
- Demand shock concentrated on “postpone-able” goods: consumer durables and investment goods hardest hit.
- Postpone-able goods comprise a much larger share of trade than GDP or industrial production, so trade falls more rapidly than output (Levchenko and others, 2009).
- Trade in services fell by less than trade in goods.
- Global supply chains (geographically unbundled manufacturing) amplified the collapse (Bems et al., 2010).
- Merchandise trade tends to fluctuate more than proportionately to changes in national income; elasticity of trade to income grew over time to about about 3½ in the 1990s (Freund, 2009; Freund and Irwin, 2002).
- Trade more responsive to GDP during global downturns than in tranquil times.

B. General Financing Constraints
- Historical crises show large declines in trade finance: Brazil and Argentina declines of as much as 30 to 50 percent in 2002; about 50 percent in Korea in 1997-98; USD 6 billion to USD 1 billion in Indonesia during the Asian crisis (Wang and Tadesse, 2005).
- Access to affordable trade finance in the recent crisis was constrained unevenly: World Bank survey (425 firms, 78 banks) reports constraints in some developing regions and for smaller firms (Malouche, 2009).
- Impact varied by firm size, sector, and integration into global economy; some African exporters had not experienced significant cutbacks up to February-March 2009 (Humphrey, 2009).
- Inter-firm trade credit likely constrained when access to financial institutions is constrained during downturns; firms with less access to credit offer less trade credit (Petersen and Rajan, 1997; Love et al., 2007).
- Evidence from past banking crises indicates reduced credit availability to export sectors amplifies negative demand shocks on exports:
  - Iacovone and Zavacka (2009): banking problems amplify impact of negative demand shocks on exports; growth slower in export-oriented sectors reliant on external finance.
  - Amiti and Weinstein (2009): during 1992–93 Japanese banking crisis, firms whose main bank was more affected had weaker export performance; up to a third of Japanese export decline in 1992–93 may have been caused by banking crisis.

*Source: IMF/BAFT-IFSA Trade Finance Survey results and accompanying analysis, as presented in the supplied chapter content.*

### 40.      Chauffour and Farole (2009) however cautioned against the notion of a large trade

### _wp1116 - 40.      Chauffour and Farole (2009) however cautioned against the notion of a large trade

### Trade finance “gap” and its nature
- Chauffour and Farole (2009) cautioned against the notion of a large trade finance “gap.”
- Two broad cases that would create a real trade finance gap:
  - (i) insufficient supply (i.e., “missing markets”)
  - (ii) being supplied at prices that are temporarily too high to meet demand in the market (i.e., “overshooting markets”)
- Empirical observation in this paper: trade finance is not down to nearly the same degree as actual trade flows.

### Financial crises and recessions
- Financial crises contribute an additional negative effect on trade, apart from the associated contraction in output.
- Thomas (2009) finds that the effect of financial crisis has an additional negative effect on trade.
- The current crisis (as described) includes both financial and real components, which could partially explain the severity of the collapse in trade.

### Related-party (intra-firm) trade and implications for trade finance
- Trade between related parties should not be affected by lower access to trade finance because subsidiaries shipping goods between them typically do not need bank-intermediated trade finance to mitigate payment risk.
- The observed pattern of the trade slowdown across countries and sectors with different shares of intra-firm trade is not consistent with vulnerabilities to trade finance.
- There appears to be a positive correlation between the decline in trade and the share of related-party trade of a country or sector (Table 10).
- Table 10 excerpts (shares and growth, exports to the US; 2000 data for shares, 2009H1 for growth, in percent of value):
  - Category shares and growth:
    - Cereals and cereal preparations 0.199 -24.3%
    - Articles of apparel and clothing 0.156 -14.0%
    - Road vehicles 0.953 -49.2%
    - Miscellaneous manufactured articles 0.234 -13.0%
    - Iron and steel 0.328 -16.7%
    - Telecommunications & sound recordings 0.500 -21.2%
    - Petroleum, petroleum products 0.315 -52.2%
  - Country shares and growth:
    - Brazil 0.293 -36.9%
    - China 0.181 -13.4%
    - Germany 0.647 -35.6%
    - Japan 0.743 -41.9%
    - Mexico 0.661 -27.9%
    - Turkey 0.095 -23.5%
  - Sources: Bernard, Jensen, Redding, and Schott (2008) for share, US Census for exports.
- Empirical note (from a sample of 890 firms in six emerging economies): firms that are financially more vulnerable to crises extend less trade credit to their customers.

### Official sector response — overview
- National and multilateral institutions expanded trade finance activities in response to the global crisis.
- G20 leaders called for sufficient additional capacity to support $250 billion of trade over the 2009-2010 period and appealed to national regulators to demonstrate flexibility in national implementation of Basel II capital requirements for trade finance (G20 Leaders Summit, 2009).
- Official-sector measures aimed to reassure markets and backstop private provision of trade finance.

### Export Credit Agencies (ECAs)
- ECAs in advanced and major emerging market countries took measures to ensure sufficient capacity to insure exports to, and in some cases imports from, developing and emerging market countries.
- OECD (2009) survey of selected ECAs: some ECAs reported increases in their portfolios, with new commitments being up by about 30-50 percent.
- Measures by ECAs included:
  - increased ceilings or capital
  - higher percentages of cover of individual export transactions
  - enhanced support for working capital
  - introduction of new products and joint efforts targeting most vulnerable groups of exporters (e.g., SMEs)
  - consulting and advisory services, free credit assessments, programs aimed at facilitation of regulatory environment
  - enhanced international cooperation via bilateral agreements with ECAs of major trading partners
- ECA coverage of trade increased: Berne Union data show ECAs’ share of world exports increased from about 8 percent during 2005-2008 to slightly above 9 in 2009 (Figure 17).
- Interpretation: the one-eighth increase in share is similar in magnitude to the increase in bank-intermediated trade finance and may reflect increased risk aversion by non-financial firms; ECAs likely helped cushion the downturn and provided signaling reassurance to the private sector.

### Multilateral Development Banks (MDBs)
- MDBs implemented a variety of programs and measures to facilitate trade finance; these actions were well received by commercial banks (Figure 18).
- G-20 support included leveraging private capital through guarantees, bond insurance and bridging finance, and support for creation of a Global Trade Liquidity Pool.
- Examples of commitments and instruments: guarantees, lines of credit, bond instruments guaranteed by future flows of trade, risk-mitigating instruments against commercial and political risks.
- MDB expansion targeted developing economy exports and imports, partially filling gaps left by other official interventions.

Box 2 — Selected MDB responses (program size and actions)
- EBRD: Trade Facilitation Program (TFP) enhanced from €800 million to €1.5 billion in 2009 to mitigate crisis impact and boost trade in member countries.
- ADB: On 31 March 2009, expanded Trade Finance Facilitation Program (TFFP) exposure limit to US$1 billion from US$150 million; by end-2009 total TFFP exposure reached over US$700 million, exceeding the US$500 million target set for 2009.
- IDB: In 2009, Trade Finance Facilitation Program (TFFP) enhanced from US$400 million to US$1 billion; TFFP network included 198 Confirming Banks from 70 international banking groups, and 41 Issuing Banks in 15 Latin American and Caribbean countries, with US$756 million in approved credit lines.
- AfDB: In 2009 established the Trade Finance Initiative of US$1 billion to help member countries cope with the global crisis.
- IFC: Doubled its existing trade finance program to US$3 billion; helped launch Global Trade Liquidity Program (GTLP) which began operations in May 2009 with targeted commitments of US$4 billion from public sector sources and aims at supporting up to US$50 billion of trade in three years.

### Market and bank perceptions of official response
- IMF/BAFT-IFSA Trade Finance Survey, March 2010 (Figure 18) shows perceptions across All banks, Small banks, Medium banks, Large banks:
  - Response categories captured: Don't know, No impact, Neutral, Somewhat positive, Largely positive.
  - Aggregate response distribution (visual data reported in source figure).

### Concluding remarks — causes and effects
- The sudden drop in trade in late 2008 and shocks to the financial system raised concerns that a collapse in trade finance caused broader disruptions.
- Parallels between financial markets and trade finance markets (lack of liquidity, emerging markets role, counterparty risk concerns) help explain initial worries.
- Primary drivers identified:
  - Demand factors played the most important role in the trade collapse.
  - Prompt action by the G-20 and ECAs likely eased pricing pressures and helped keep trade flowing during the worst of the disruptions.

*Source: IMF working paper content (excerpts provided).*

### 48.      Research indicates that continuing tight financing conditions can constrain growth,

### _wp1116 - 48.      Research indicates that continuing tight financing conditions can constrain growth,

### Key findings and analysis
- Research indicates that continuing tight financing conditions can constrain growth, hampering rebalancing according to macro factors.
- 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 be a shift in the types of banks that provide trade finance.
- Small and large banks reacted differently to the shock during 2008 and 2009 and have different capacity to respond.

### Survey evidence (selected results from IMF/BAFT‑IFSA surveys)
- Outlook for Trade Finance Demand in 2009 (Table II.8):
  - Further deterioration: 12
  - Stabilization: 58
  - Improvement: 28
  - Other: 2
- Reasons for the Decline in Value of Trade Finance (Table II.4; percent of respondents):
  - A fall in the demand for trade activities: 86
  - A fall in the price of transactions (e.g. commodity prices): 49
  - Less credit availability at your own institution: 40
  - Less credit availability at your counterparty banks: 40
  - A shift towards open account transactions: 9
  - A shift towards cash-in-advance transactions: 6
- Pricing and margins (Table II.15; 2008Q4 vs. 2007Q4; mean change = percentage points over cost of funds):
  - Letters of credit — Mean change: 28; Median change: 0
  - Export credit insurance — Mean change: 18; Median change: 0
  - Trade-related lending — Mean change: 44; Median change: 0
  - Average across products — Mean change: 30; Median change: 0
- Impact of Basel II on ability to provide trade finance (Table II.6; percent of respondents):
  - Not applicable (incl. Basel II has not been implemented): 19 50 20 11 9 17 10
  - No impact: 25 50 40 11 23 33 33 30
  - Negative impact: 56 04 07 85 53 33 31 00
  - (Note: table entries presented as in source.)
- Change in trade-related lending guidelines among respondents reporting tightening (Table II.7; percent of respondents):
  - Become more cautious with certain sectors: 76
  - Become more cautious with certain countries: 78
  - Requested more collaterals (including equity contributions and cash deposits): 71
  - Requested shorter tenors: 65
  - Requested stronger covenants: 53
  - Requested more DC or LC (including standby and confirmed LC): 41
  - Requested more Export Credit Insurance: 41

### Implications and considerations for policy and market participants
- Expect higher sustainable pricing for trade finance instruments compared with pre-crisis levels if prior pricing was artificially low.
- Anticipate structural change in the supplier base for trade finance, with heterogeneous responses and capacities across small and large banks.
- Monitor and address demand-side falls and constrained credit availability as principal drivers of trade finance contraction (e.g., demand fall: 86 percent of respondents).
- Policy and industry responses could include measures to mitigate reduced availability (e.g., support for export credit insurance and collateral frameworks) given that 41 percent of respondents reported requesting more Export Credit Insurance and 71 percent requested more collaterals where guidelines tightened.
- Consider the implications of regulatory frameworks (Basel II effects flagged by respondents) on trade finance provision and the need for targeted supervisory and policy clarity to avoid unintended retrenchment.

*Source: IMF/BAFT-IFSA Trade Finance Survey results and accompanying text in _wp1116 (sections reproduced in source content).*

### APPENDIX III. TRADE FINANCE SUPPLY AND DEMAND FACTORS

### APPENDIX III. TRADE FINANCE SUPPLY AND DEMAND FACTORS

### Channels transmitting macro/market conditions into trade finance
- Macroeconomic and broader financial market conditions and perceptions affect trade finance through several channels.
- Banks provide risk mitigation and liquidity for international trade based on:
  - their cost of funds; and
  - the amount of capital needed to back the risk associated with the individual transaction.
- Trade finance pricing is typically stated as a margin above a bank's cost of funds, and this margin is driven by the amount of capital the bank needs to set aside against the risk of the financing.
- The factors affecting bank cost of funds are the same as those discussed for financial markets in general.

### Bank supply of trade finance: capital, regulation, and crisis dynamics
- The amount of capital required to back a risk is determined by:
  - the bank's views of counterparty, country, and other risk factors; and
  - supervisory regulations.
- Bank trade finance supply is constrained by the more stringent of:
  - the bank’s own credit assessments of necessary capital to back a given risk; and
  - the regulatory minimum capital requirements.
- During the crisis:
  - banks required increasing amounts of capital to back all risk, including trade finance, as bank risk perceptions rose and economic conditions deteriorated.
  - Regulatory constraints have been a public policy priority of BAFT-IFSA and the ICC Banking Commission, which argued for modifications to Basel II and related national supervisory regulations to reduce the amount of capital needed to underpin trade finance.

### Demand for bank-intermediated trade finance
- Demand depends on:
  - importers’ and exporters’ subjective assessments of risk and their risk aversion; and
  - the opportunity costs faced by both for working capital.
- Because banks may better assess and diversify counterparty risk, importers and exporters may pay banks to cover payment/performance risks.
- In the crisis:
  - increased risk aversion among importers and exporters increased willingness to pay for bank trade finance despite increased pricing.
- Demand heterogeneity and ambiguity during the crisis:
  - “Blue chip” firms, particularly in advanced economies, could often borrow for working capital or trade-related financing more cheaply in the very low interest rate environment created when major central banks cut policy rates to historic lows.
  - Cash-rich exporters may have become more willing to tie up working capital in trade-related receivables through open account terms as the near-zero interest rate environment reduced the opportunity cost of doing so.
  - Importers perceived as less creditworthy (e.g., small and medium-sized enterprises) or whose banks relied on wholesale funding from advanced economies (e.g., firms in some emerging markets) may have faced reduced availability and increased cost of unsecured working capital financing.
  - These less-creditworthy firms may have sought to increase trade-related borrowing to replace other forms of working capital financing.
  - As a result, the impact of rising uncertainty on the demand for trade finance is ambiguous.

### Forms of trade finance and risk allocation
- Trade finance arrangements vary from pure exporter–importer arrangements to insurance services and bank credit; each mitigates different types and amounts of risk.
- Open account financing (most common in normal circumstances):
  - exporter extends credit to importer directly (e.g., payment due 90 days from delivery);
  - exporter bears credit risk and liquidity provision.
  - Variants:
    - open account among unrelated parties relies on established relationships, trust, and reputation instead of bank risk mitigation;
    - some open account transactions are insured by ECAs (closely related to bank-provided export credit insurance);
    - much international trade is intra-firm trade and presumably has little need for bank or ECA trade finance.
- Cash-in-advance / prepayment:
  - exporter requires payment in advance (often at a discount); importer bears performance risk and liquidity burden.
- Bank-intermediated trade finance provides intermediate approaches enabling banks to:
  - verify delivery of goods;
  - guarantee payment for goods upon delivery;
  - provide liquidity before, during, and after shipment.

### Market shares and aggregate figures (IMF staff estimates and surveys)
- IMF staff estimates, IMF-BAFT surveys of commercial banks, and Berne Union data suggest approximate shares of global trade covered by different forms of trade finance as depicted in Figure IV.1:
  - Open Account: 38% - 45%, $6.0 - $7.2 trillion
  - Intra-Firm: $3 - $3.5 trillion
  - Bank Trade Finance: $5.5-$6.4 trillion
  - ECA / Arm's-Length Guaranteed / Non-Guaranteed: $1.25-1.5 trillion
  - Additional percentages/labels visible in figure text: 19%-22% 35%-40%
  - Total benchmark: $15.9 trillion in global merchandise trade (2008 IMF estimate)

### Bank-intermediated instruments and structures
- Letters of credit (documentary credits):
  - “Unconfirmed” letter of credit: issuing bank (importer’s bank) guarantees payment upon presentation of documents confirming delivery.
  - “Confirmed” letter of credit: supplementary guarantee from another bank (typically the exporter’s bank) providing greater protection against importer’s bank or country risk.
- Other bank-intermediated forms:
  - banks provide liquidity in advance of shipment as export-related working capital or transaction-specific financing;
  - post-delivery financing to importers to allow time to generate revenue from imported goods;
  - banks purchase trade receivables at a discount (forfaiting) to relieve exporters of liquidity provision and take on credit risk;
  - complex financing packages combining working capital credit, purchase of export accounts receivables, export credit insurance, bookkeeping and documentary collection (export factoring or supply-chain financing);
  - documentary collections: banks facilitate delivery and processing of documentation without assuming payment risk.
- Secondary markets for trade finance exposures:
  - original bank can sell exposures via syndicated loans, asset-backed securities, or bilateral transactions between banks;
  - secondary markets help address risk concentrations in individual importers, importing countries, or sectors and have benefits and risks analogous to syndicated/securitized asset markets.

*Source: APPENDIX III. TRADE FINANCE SUPPLY AND DEMAND FACTORS (excerpt).*

### APPENDIX VIII. GLOSSARY

### _wp1116 - APPENDIX VIII. GLOSSARY

### Definitions

- Advising bank: The advising bank is typically the exporter's regular bank in a letter of credit transaction. The advising bank acts as the agent for the exporter (also referred to as the beneficiary) in negotiating the letter of credit and facilitating communications with the importers bank (i.e., the issuing bank), but does not take on any payment risk. When the exporter’s bank is providing a secondary guarantee in addition to that provided by the importer's bank, it is a confirming bank and the letter of credit becomes a confirmed letter of credit.

- Bank-intermediated trade finance: This is a term specific to this paper to refer to those forms of trade finance in which commercial banks take on either credit risk or provide liquidity.

- Basel II: The Basel II rules for trade finance established different and often higher capital requirements for trade finance assets than had existed under the Basel I rules. National implementation schedules differed for Basel II rules and some countries were not yet applying Basel II rules during the period of the surveys for this paper.

- Basel II flexibility: Basel II prudential rules for banks entail setting capital requirements for trade finance (and certain other) assets with a maturity less than one year that are equivalent to those of assets with a maturity of exactly one year. However, it also provides national bank supervisors with the flexibility to exempt certain claims, including short-term trade finance assets, from this one year maturity floor if they choose to do so.

- Berne Union: The Berne Union is the main association of export credit agencies and includes public, government-sponsored and private export credit insurers. Associated with the Berne Union is The Prague Club, an association for new export credit agencies. Notwithstanding the names, both are based in London.

- Cash-in-advance: This implies pre-payment by the importer prior to the shipment of goods by the exporter. Cash-in-advance provides the greatest security to the exporter and the least security to the importer, and is typically used in small transactions or where importers are particularly concerned about the creditworthiness of the importer. Because cash-in-advance financing ties up the importers working capital and shifts all risk to the importer, it may be unacceptable to well-know, creditworthy, or established customers.

- Confirming bank, Confirmed letter of credit: A confirmed letter of credit is one in which the exporter's bank (the confirming bank) provides a secondary guarantee to that provided by the importer's bank (i.e., the issuing bank).

- Cover: Insurance or risk mitigation for the exporter to cover risk of non-payment. This can take a variety of forms including letters of credit arranged by the importer or export credit insurance contracted by the exporter.

- Documentary collection: Documentary collection refers to arrangements in which commercial banks play the same roles in document preparation, delivery, and verification as they do with letters of credit. However, neither the importer’s nor the exporter's bank provide cover or liquidity in documentary collections. Instead, they are facilitating the processing of the transaction on a fee-for-service basis. For the purposes of this paper, documentary collections is not considered a part of bank-intermediated trade finance.

- Documentary credits: A synonym for letters of credit that is used more often outside the U.S.

- Export credit agency (ECAs): Export credit agencies are providers of insurance for international trade transactions. ECAs may be public, private, or government sponsored. Many currently private ECAs were previously in the public sector, and have subsequently been privatized. Some ECAs have hybrid arrangements with part of their business on purely private terms and part at the direction of the government, with the government bearing risk, providing liquidity or both. A typical ECA is chartered to provide export credit insurance to exporters of the country in which it is based, although some ECAs also provide direct lending and working capital financing in support of the country’s exports. Most major ECAs are the members of the Berne Union.

- Export credit insurance: Insurance sold to exporters against credit risk which would not necessarily involve a claim against the importer’s bank. Export credit insurance generally covers less that the full value (e.g., 90 or 95 percent) of the exports. Export credit insurance can be provided by banks, other financial institutions and ECAs.

- Factoring: Factoring refers to comprehensive trade-related financial services that combine export-related working capital, insurance, and other financial services for exporters. Factoring generally involves payments up front to the exporter by the bank or other financial institution and full absorption of payment risk by the financial institution (see also forfaiting).

- Forfaiting: Forfaiting is the sale of trade finance receivables by an exporter to a financial institution at a discount to a bank or other financial institution. The buyer of the receivables generally absorbs all risk of non-payment. Forfaiting is generally only available for an ongoing stream of business rather than on a transaction-by-transaction basis.

- Funded transaction: A trade finance transaction in which banks provide liquidity as well as risk mitigation.

- Letter of credit: A letter of credit is a payment guarantee on behalf of an importer by a bank (usually its regular bank) for which the exporter is the beneficiary. Payment is due upon presentation of specified documents such as commercial invoices, bills of lading, or other proof of purchase, shipment, or delivery and any other conditions such as the passage of a specified period of time. Notwithstanding its name, a letter of credit does not necessarily involve any lending by the banks. However, if may also involve bank lending if it allows the exporter to be paid by the issuing bank before the importer needs to pay the issuing bank.

- Medium-term financing: Medium-term financing is defined differently in different trade finance contexts. In some contexts (e.g., Berne union data), it refers to financing with a maturity of more than one year, but in the context of the OECD arrangement, it refers to maturities of two to five years.

- OECD arrangement: The Arrangement on Officially Supported Export Credits is an agreement among OECD member and certain other countries placing limitations on the terms and conditions for export credits (e.g., minimum interest rates) that are offered by government or government-affiliated ECAs with a maturity of two years or longer to ensure that ECAs operate in a manner that reflects market conditions. The OECD follows developments in shorter maturities, but the agreement does not apply to the short-term trade finance activities of ECAs.

- Open account: Trade transactions in which the exporter receives payment from the importer after delivery of goods and without risk mitigation from the banking sector. This can include intra-firm or related-party trade, arm’s-length trade between unrelated firms, and trade supported by ECAs. The last of these categories has much in common with bank-supported trade finance, but it is included in open account in this paper for measurement reasons.

- Pre-export financing: Working capital lending to exporters to finance the production of goods for export.

- Post-financing, post-import financing: Working capital lending to importers after goods are received (e.g., a line of credit to a wholesaler or retailer to financing the inventory of goods between the time of import and the time of sale to the final customer.

- Secondary market: Transactions in which the bank making the initial trade finance transaction with a real-sector customer sells part or all of its claim to other institutions. This category ranges from bilateral transactions between two banks to limit exposure to a single counterparty or country to syndicated loans and asset-backed securities composed of trade-finance claims.

*Source: APPENDIX VIII. GLOSSARY*

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