Editors -HDQĥ3LHUUH&KDXIIRXU0DULHP0DORXFKH Trade Finance during the Great Trade Collapse Trade Finance during the Great Trade Collapse Jean-Pierre Chauffour and Mariem Malouche Editors Trade Finance during the Great Trade Collapse © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN: 978-0-8213-8748-1 eISBN: 978-0-8213-8749-8 DOI: 10.1596/978-0-8213-8748-1 Library of Congress Cataloging-in-Publication Data Chauffour, Jean-Pierre. Trade finance during the great trade collapse / Jean-Pierre Chauffour and Mariem Malouche. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8748-1 — ISBN 978-0-8213-8749-8 (electronic) 1. Export credit. 2. Exports—Finance. 3. Financial crises. 4. International trade. I. Malouche, Mariem, 1973- II. Title. HG3753.C435 2011 332.7'42—dc22 2011012219 Cover photos: © moodboard/Corbis (Money Rolls); Adobe Image Library (background) Cover design by Tomoko Hirata/World Bank contents Foreword xi Acknowledgments xiii About the Editors and Contributors xv Abbreviations xix Overview 1 Section I SPECIFICITY OF TRADE CREDIT AND TRADE FINANCE DURING CRISES 25 1 Trade Credit versus Bank Credit during Financial Crises 27 Inessa Love 2 Firms’ Trade-Financing Decisions during Crises 41 Daniela Fabbri and Anna Maria C. Menichini 3 Interfirm Trade Finance: Pain or Blessing during Financial Crises? 59 Anna Maria C. Menichini 4 Financial Crisis and Supply-Chain Financing 73 Leora Klapper and Douglas Randall Section II TRADE FINANCE DURING THE 2008–09 CRISIS: INNOCENT OR GUILTY? 87 5 Trade Finance in the 2008–09 Financial Crisis: Evidence from IMF and BAFT–IFSA Surveys of Banks 89 Irena Asmundson, Thomas Dorsey, Armine Khachatryan, Ioana Niculcea, and Mika Saito 6 Global Perspectives in the Decline of Trade Finance 117 Jesse Mora and William Powers v 7 The Role of Trade Finance in the U.S. Trade Collapse: A Skeptic’s View 133 Andrei A. Levchenko, Logan T. Lewis, and Linda L. Tesar 8 Trade Finance in Africa: A Survey of Firms 149 John Humphrey 9 Financial Crises and African Trade 161 Nicolas Berman and Philippe Martin 10 World Bank Firm and Bank Surveys in 14 Developing Countries, 2009 and 2010 173 Mariem Malouche 11 Private Trade Credit Insurers during the Crisis: The Invisible Banks 199 Koen J. M. van der Veer 12 Trade Finance in the Recovery of Trade Relations after Banking Crises 213 Cosimo Beverelli, Madina Kukenova, and Nadia Rocha Section III UNDERPINNINGS OF TRADE FINANCE INTERVENTION DURING FINANCIAL CRISES 233 13 The Theoretical Case for Trade Finance in a Liquidity Crisis 235 Tore Ellingsen and Jonas Vlachos 14 Why Boosting the Availability of Trade Finance Became a Priority during the 2008–09 Crisis 245 Jean-Jacques Hallaert 15 Market Adjustment versus Market Failure 257 Jean-Pierre Chauffour and Thomas Farole 16 Should Developing Countries Establish Export Credit Agencies? 273 Jean-Pierre Chauffour, Christian Saborowski, and Ahmet I. Soylemezoglu Section IV INSTITUTIONAL TRADE FINANCE SUPPORT DURING THE 2008–09 FINANCIAL CRISIS 287 17 World Trade Organization Response to the Crisis: A Convening Power to Boost the Availability of Trade Finance 289 Marc Auboin vi Contents 18 The World Bank Group’s Response to the Crisis: Expanded Capacity for Unfunded and Funded Support for Trade with Emerging Markets 301 Bonnie Galat and Hyung Ahn 19 Regional Development Banks’ Response to the Crisis: Scaling Up the Trade Finance Facilities 319 Rudolf Putz, Ghazi Ben Ahmed, Steven Beck, and Daniela Carrera 20 Credit Insurance in Support of International Trade: Observations throughout the Crisis 337 Fabrice Morel 21 Business Responding to the Financial Crisis: Setting Up a Policy Agenda for Trade Finance 357 Thierry J. Senechal 22 Private Bankers’ Response to the Crisis: Warnings about Changes to Basel Regulatory Treatment of Trade Finance 373 Donna K. Alexander, Tan Kah Chye, Adnan Ghani, and Jean-François Lambert 23 Trade Finance under the Current Basel Regulatory Framework: What are the Issues? 385 Marc Auboin Index 393 Contents vii Boxes 5.1 The IMF/BAFT-IFSA and Other Bank Surveys 97 5.2 Key Findings and Observations from the Fifth Trade Finance Survey 114 6.1 Common Types of Trade Finance and the Risk for Exporters 119 10.1 Policy Update on Selected Countries and Multilateral Initiatives 189 19.1 Terms and Conditions of TFI Credit Products 325 19.2 IDB Trade Financing Increases Intraregional Transactions 330 20.1 Credit Insurance and How It Works 338 20.2 The Berne Union 354 Figures O.1 Trade Fluctuations by Region, 2007–10 2 O.2 Trade Finance Arrangements, by Market Share 4 2.1 Regime where the Incentive Motive Dominates 49 2.2 Regime where the Liquidation Motive Dominates 51 2.3 Trade Credit Intensity, Wealth, and Creditor Protection 53 2.4 Input Tangibility, Wealth, and Creditor Protection 54 4.1 Extension of Trade Credit, by Country 75 4.2 Changes in the Extension of Trade Credit, by Country 76 4.3 Access to Bank and Supplier Financing, by Country 78 4.4 Trade Credit and Liquidity 83 5.1 Trade Finance Arrangements, by Market Share 90 5.2 Merchandise Trade Index, 2007 to mid-2010 92 5.3 Global Funding Pressure, 2008 to mid-2010 93 5.4 Three-Month LIBOR Spreads in Advanced Markets 94 5.5 External Debt Market Spreads in Emerging Markets, 2008 to mid-2010 95 5.6 Loans to Nonfinancial Firms in the Euro Area and U.S., 2007 to mid-2010 95 5.7 U.S. Commercial Paper: Outstanding Accounts, 2008 to mid-2010 96 5.8 Overall Changes in Merchandise Exports and Trade Finance 100 5.9 Changes in Merchandise Exports and Trade Finance, by Country Group 101 5.10 Estimated Composition of the Trade Finance Industry 102 5.11 Overall Change in Trade-Related Lending Guidelines, Q4 CY09 vs. Q4 CY08 104 5.12 Ability to Satisfy “All Customer Needs” 106 5.13 Effect of “Recent Developments” on Pricing of Trade Instruments 110 5.14 Change in Trade Instrument Pricing 111 5.15 Change in Probability of Default, 2007–09 113 viii Contents [...]... 2: The Role of Trade Finance in the 2008–09 Trade Collapse The 2008 financial crisis and the ensuing trade collapse immediately prompted policy makers and analysts to link the two events: Trade dropped in part because of a lack of supply of trade finance Given the lack of data and the relative secure nature of trade finance, however, some analysts raised doubts about the prominent role of trade finance. .. limits on trade finance tightened during the crisis However, they also find that increases in the price of trade finance products did not stand out from those for other commercial bank products Their results suggest that factors other than trade finance chiefly the collapse of global demand and the decline in commodity prices—played a more important role in the 2008–09 trade collapse Nevertheless, increased... investment-bank surveys to gauge the impact of the financial crisis on trade finance availability and constraints The ICC surveys indicate that it became more difficult to raise money to finance trade in the aftermath of the Lehman Brothers collapse and that both the availability and the price of trade finance severed in late 2008 The surveys indicate that the supply of trade finance remained constrained... exacerbate the trade finance shortfall during the crisis and in the postcrisis environment? What Is Trade Finance, and Why Does It Matter? The global financial crisis demonstrated that trade finance is a broad concept that encompasses various products, mechanisms, and players When trade collapsed in the fall of 2008, trade finance rapidly became the focus of attention Foremost, the crisis illuminated the dearth... liquidity into the real economy in support of trade transactions However, because of the dearth of data on trade finance, they had no gauge to estimate the magnitude of the market gap or even to know whether trade finance was indeed a main factor behind the drop in trade It was also not clear whether governments’ intervention in favor of a specific segment of the financial system the trade finance market—was... of trade finance over two years This book assembles 23 contributions to tell the story of trade finance during the 2008–09 global economic crisis and to answer four main questions: 1 What do we know about the specifics and determinants of trade finance during financial crises, especially the role of interfirm trade credit versus bankintermediated trade finance? 2 Was the availability and cost of trade. .. parties with a comprehensive assessment of the role of trade finance in the 2008–09 great trade collapse (Baldwin 2009) and the subsequent role of governments and institutions to help restore trade finance markets The 1997–98 Asian crisis had already illustrated the critical role that trade finance plays during a financial crisis—especially its effects on trade but that crisis remained regionally... understand the root causes of the global crisis and to reach consensus on actions to address its immediate effects In the case of trade, a key question concerned the extent to which a drying up of trade finance caused the observed decline in trade flows There are different types of trade finance Banks offer a number of trade finance instruments that vary in terms of risk A large share of global trade finance. .. Financing The analysis of the link between interfirm trade credit and bank trade finance during the 2008–09 global crisis has been blurred by the fact that the financial crisis swiftly spilled over to the real economy and constrained firms’ cash reserves and revenues, putting additional pressure on their capacity to extend trade credit As such, both interfirm trade credit and bank trade finance dropped in the. .. demand to finance international trade operations, leaving a trade finance “gap” estimated at around $25 billion The liquidity problem spread from the United States and the European Union (EU) to developing countries’ markets As the secondary market dried up in late 2008, the trade finance gap reportedly increased to up to $300 billion In the midst of the crisis, these alarming developments were at the epicenter . Editors -HDQĥ3LHUUH&KDXIIRXU0DULHP0DORXFKH Trade Finance during the Great Trade Collapse Trade Finance during the Great Trade Collapse Jean-Pierre Chauffour and Mariem Malouche Editors Trade Finance during the Great Trade Collapse ©. understanding the effects of the changes in the international regulatory framework for the banking sector on the supply of trade finance. Foreword xi In response to the crisis, the International Finance. restoring trade finance markets. A deeper understanding of the complexity of trade finance remains crit- ical as the world economy recovers and the supply of trade finance improves. The international