Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees
IMF Working Papers, February 24, 2023
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Bibliographic details
- Authors: Antonis Kotidis, Margaux MacDonald, Dimitris Malliaropulos
- Published: February 24, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400234415.001
Overview and authorship
- Title: Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees
- Authors: Antonis Kotidis, Margaux MacDonald, Dimitris Malliaropulos
- Publication type: IMF Working Paper
- Date: February 24, 2023
Core findings
- Banks guarantee international trade through letters of credit; when banks’ role as trade guarantors is compromised, trade declines.
- Using the case of the Greek capital controls in 2015, firms more dependent on domestic banks experienced a steep decline in imports and, subsequently, exports.
- During the capital controls period, letters of credit had to be backed by firms’ own cash collateral rather than the bank guarantee.
- Cash-poor firms imported relatively less under cash-collateral requirements.
- Public intervention to guarantee transactions mitigates some of the decline in imports.
Mechanism and channels
- Primary channel: disruption to bank-provided guarantees (letters of credit) when banking-system confidence collapses.
- Operational change observed: substitution of bank guarantees with firms’ own cash collateral for letters of credit during capital controls.
- Distributional effect: firms with less cash liquidity (cash-poor firms) reduce imports more than cash-rich firms.
Policy implications and recommendations
- Public guarantees of transactions can help offset the decline in imports caused by the disruption of bank guarantees.
- Policy measures should consider targeted support for cash-poor firms reliant on trade guarantees to prevent disproportionate trade contractions.
Subjects and keywords (as provided)
- Subjects: Balance of payments; Capital controls; Capital outflows; Commercial banks; Credit; Financial institutions; Imports; International trade; Money
- Keywords: Asia and Pacific; Bank guarantee; bank intermediation channel; capital control; Capital controls; Capital outflows; cash-poor firm; Commercial banks; Credit; exports; imports; letters of credit; log letters of credit; outflow control; trade guarantor
Content in this bundle
- Working Paper