9 Changes in Merchandise Exports and Trade Finance, by Country Group

102



Trade Finance during the Great Trade Collapse



Figure 5.10 Estimated Composition of the Trade Finance Industry

100

90



percentage of respondents



39



38



39



37



40



37



22



24



22



24



Q4 CY07



80



Q4 CY08



Q2 CY09



43



70

60

50

40



35



30

20

10

0



open-account transactions



a



Q4 CY09



bank-intermediated transactions



cash-in-advance transactions

Sources: IMF-BAFT 2009; IMF and BAFT-IFSA 2010.

Note: CY = calendar year. The data show respondents’ answers to this survey question: “What is your

‘best’ estimate for the composition of the trade finance industry as a whole?” The respondents’ samples

differ across surveys.

a. Figures for Q2 CY09 are from the July 2009 survey, which did not have the same set of respondents as

the 2010 survey and therefore may not be fully comparable to the figures in other columns. However,

the survey results for equivalent periods between the July 2009 and March 2010 surveys line up closely,

suggesting a broad consistency in results across both surveys.



far the most important, with the rise or fall in commodity prices a distant second,

as table 5.3 shows. Significant minorities of institutions cited supply-side factors

(such as credit availability at either their own institution or counterparties) and

shifts to or from open-account or cash-in-advance transactions. Looking across

different size classes of banks, credit availability factors seemed to be relatively

more important at large banks, presumably reflecting the greater need for deleveraging at some of the largest institutions.



Trade Finance in the 2008–09 Financial Crisis



103



Table 5.3 Reasons for Decline in Value of Trade Finance

percentage of respondents

All

banks

Fall in the demand for trade activities

Fall in the price of transactions

(e.g., commodity prices)

Less credit availability at your

own institution

Less credit availability at

your counterparty banks

Shift toward open-account

transactions

Shift toward cash-in-advance

transactions

Decline in support from export

credit agencies

Decline in credit from multilateral

institutions

Other reasons



Small

banks



Medium-size

banks



Large

banks



85



81



90



80



38



25



24



56



30



19



24



40



30



6



24



48



23



19



33



16



21



31



14



20



8



0



5



16



0

18



0

31



0

10



0

16



Source: IMF and BAFT-IFSA 2010.

Note: Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100 billion in assets; large

banks = > $100 billion in assets. Data reflect only the views of the 61 respondents that reported a

decline in value of trade finance in at least one geographic region presented and that subsequently

marked at least one option for the question.



Banks adopted stricter risk management practices in response to higher risks,

as figure 5.11 and tables 5.4 and 5.5 illustrate. They differentiated more, depending on the individual client, the business segment (trading, retail, commodities,

and so on), and home country. Banks have also limited their own risk through

expanded insurance, shorter loan maturities, and stronger covenants and by

requiring higher cash deposits or other collateral from clients. Large banks were

more cautious than small and medium-size banks relative to countries seen as

posing high financial risks, and they were also more likely to request confirmations or export credit insurance. On the other end of the size spectrum, small and

medium-size banks were more likely than large banks to manage risk by requiring

greater collateral or stronger covenants. The 2010 ICC survey also examined Society for Worldwide Interbank Financial Telecommunication (SWIFT) message

data and found evidence of increased risk aversion by banks and customers,

including refusals to honor letters of credit (LCs) because of discrepancies in

documents (ICC 2010).4

Most banks of all sizes indicated in the March 2010 survey that they could satisfy customer demands for trade finance, although a substantial minority of large



104



Trade Finance during the Great Trade Collapse



Figure 5.11 Overall Change in Trade-Related Lending Guidelines,

Q4 CY09 vs. Q4 CY08

100



3



6



9



90



percentage of respondents



80

70



32

35



52



60

50

40

30

20



62



56

45



10

0

small banks



medium-size banks



loosened



no change



large banks

tightened



Source: IMF and BAFT-IFSA 2010.

Note: CY = calendar year. Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100

billion in assets; large banks = > $100 billion in assets.



banks indicated that they could not, as figure 5.12 shows. This result was consistent with the greater emphasis on credit availability concerns at large banks and

also with the perception that large banks had been more heavily affected by the

need for deleveraging.

Bank Pricing and Credit Conditions for Trade Finance

The survey evidence on pricing is also consistent with a demand-driven story in

which the decline in trade finance plays no more than a modest role in the

decline in merchandise trade. The survey results indicate some increased pricing

for trade finance, at least relative to banks’ cost of funds. Other things being

equal, the increased pricing should have reduced the use of bank-intermediated

trade finance as a share of trade. The increased share of bank-intermediated

trade finance in spite of increased pricing also suggests that demand factors such

as exporter risk aversion dominated.



Trade Finance in the 2008–09 Financial Crisis



105



Table 5.4 Change in Trade-Related Lending Guidelines: Tightening

percentage of respondents

All

banks

Became more cautious with certain sectors

Became more cautious with certain countries

Requested more collateral (including

equity contributions and

cash deposits)

Requested shorter tenors

Requested stronger covenants

Faced more regulatory controls

Requested more DC or LC

(including standby and confirmed LC)

Requested more export credit insurance

Other



Small

banks



Medium-size

banks



Large

banks



74

77



71

57



78

67



71

100



62

58

47

43



64

57

64

57



83

56

56

33



43

62

29

43



42

28

2



21

21

0



44

11

0



52

48

5



Source: IMF and BAFT-IFSA 2010.

Note: DC = documentary credit. LC = letter of credit. Small banks = < $5 billion in assets; medium-size

banks = $5 billion–$100 billion in assets; large banks = > $100 billion in assets. Data reflect only the

views of the 53 respondents that reported a tightening in trade-related lending guidelines from

Q4 CY08 to Q4 CY09 and that subsequently answered this question.



Table 5.5 Change in Trade-Related Lending Guidelines: Loosening

percentage of respondents

All

banks

Became less cautious with certain sectors

Became less cautious with certain countries

Requested less collateral (including

equity contributions and

cash deposits)

Requested longer tenors

Requested weaker covenants

Faced fewer regulatory controls

Requested fewer DC or LC

(including standby and confirmed LC)

Requested less export credit insurance

Other



Small

banks



Medium-size

banks



Large

banks



83

50



100

0



67

33



100

100



67

50

50

17



100

100

100

0



67

33

67

33



50

50

0

0



33

33

0



0

0

0



33

0

0



50

100

0



Source: IMF and BAFT-IFSA 2010.

Note: DC = documentary credit. LC = letter of credit. Small banks = < $5 billion in assets; medium-size

banks = $5 billion–$100 billion in assets; large banks = > $100 billion in assets. Data reflect only the

views of the six respondents that reported a loosening in trade-related lending guidelines from Q4 CY08

to Q4 CY09 and that subsequently answered this question.



106



Trade Finance during the Great Trade Collapse



Figure 5.12 Ability to Satisfy “All Customer Needs”

100

percentage of respondents



90

80



31



25



27

41



70

60

50

40

30



69



75



73

59



20

10

0

all banks



small banks

no



medium-size

banks



large banks



yes



Sources: IMF and BAFT-IFSA 2010.

Note: Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100 billion in assets;

large banks = > $100 billion in assets.



Average pricing margins for trade finance rose during the crisis, but fewer than

half of the banks increased pricing in any single period. More banks increased

pricing than decreased pricing relative to their costs of funds. However, most

banks either held pricing steady or reduced pricing during the following periods:

• Fourth quarter of 2007 to fourth quarter of 2008 (table 5.6)

• Fourth quarter of 2008 to second quarter of 2009 (table 5.7)

• Fourth quarter of 2008 to fourth quarter of 2009 (table 5.8).

However, because the large banks account for a substantial majority of trade

finance, average pricing margins for trade finance as a whole almost certainly

increased. The largest banks were much more likely to increase pricing, and by

larger average amounts, than the unweighted averages for all banks shown in

the tables. These data suggest that pricing pressures eased in 2009 as the shares

of banks reporting pricing increases, as opposed to decreases, fell sharply, as

figure 5.13 illustrates.

The average increases in pricing were moderate for most of those banks reporting increases, particularly in 2009, as shown in figure 5.14.

There is some differentiation, according to bank size, in the factors that banks

see as affecting the pricing of trade finance. Roughly similar shares of large,



Trade Finance in the 2008–09 Financial Crisis



107



Table 5.6 Pricing Changes by Bank Size, Q4 CY08 vs. Q4 CY07

percentage of respondents

All banks



Small banks



Medium-size

banks



Large banks



Letters of credit

Increased

No change

Decreased

Mean change

Median change



38

52

10

31

0



23

63

13

17

0



19

71

10

26

0



70

24

6

50

50



Export credit insurance

Increased

No change

Decreased

Mean change

Median change



29

62

9

14

0



22

61

17

23

0



4

88

8

0

0



57

39

4

21

0



Trade-related lending

Increased

No change

Decreased

Mean change

Median change



48

40

13

48

0



41

44

15

64

0



31

48

21

29

0



69

28

3

53

20



Average across products

Increased

No change

Decreased

Mean change

Median change



38

51

10

31

0



29

56

15

35

0



18

69

13

18

0



65

31

4

41

23



Source: IMF and BAFT-IFSA 2010.

Note: CY = calendar year. Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100

billion in assets; large banks = > $100 billion in assets. Mean figures are percentage changes in the

pricing margin above bank cost of funds. Mean and median figures do not include responses for which

detailed pricing data were not provided.



medium-size, and small banks reported that they increased pricing margins

because of the increased bank cost of funds; the share of banks citing this factor

fell from about two-thirds in late 2008 to just under half in the first half of 2009.

However, the increased risk of trade finance lending relative to other bank lines of

business was a greater concern for small and medium-size banks in the latter

period, as table 5.9 shows. Conversely, increased capital requirements were cited

more often by large banks.

Large banks diverged widely from other banks in their views about the impact

of Basel II capital requirements.5 For example, large banks were more concerned



108



Trade Finance during the Great Trade Collapse



Table 5.7 Pricing Changes by Bank Size, Q2 CY09 vs. Q4 CY08

percentage of respondents

All banks



Small banks



Medium-size

banks



Large banks



Letters of credit

Increased

No change

Decreased

Mean change

Median change



46

36

18

23

0



38

41

21

16

0



48

33

19

25

0



54

33

13

31

0



Export credit insurance

Increased

No change

Decreased

Mean change

Median change



41

50

9

19

0



32

60

8

1

0



48

43

9

36

0



45

45

10

18

0



Trade-related lending

Increased

No change

Decreased

Mean change

Median change



45

35

20

28

0



33

45

21

24

0



44

30

26

14

0



61

26

13

57

22



Average across products

Increased

No change

Decreased

Mean change

Median change



44

40

16

23

0



35

49

17

14

0



47

35

18

25

0



53

35

12

35

7



Source: IMF-BAFT 2009.

Note: CY = calendar year. Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100

billion in assets; large banks = > $100 billion in assets. Mean figures are percentage changes in the

pricing margin above bank cost of funds. Mean and median figures do not include responses for which

detailed pricing data were not provided.



about the impact of Basel II on their ability to provide trade finance, as table 5.10

shows. This finding is consistent with the more frequent citation of increased capital requirements as a factor behind increased pricing margins.

Consistent with the survey results on the factors driving increased pricing, no

small banks and only a minority of medium-size banks cited Basel II as having a

negative impact on their ability to provide trade finance. Interestingly, a minority

of banks of varying size cited Basel II as having a positive impact on their ability to

provide trade finance. As with the banks’ divergent responses about pricing, this

finding may reflect that differing initial capital and risk requirements have



109



Trade Finance in the 2008–09 Financial Crisis



Table 5.8 Pricing Changes by Bank Size, Q4 CY09 vs. Q4 CY08

percentage of respondents

All banks



Small banks



Medium-size

banks



Large banks



Letters of credit

Increased

No change

Decreased

Mean change

Median change



40

36

23

6

0



47

33

20

9

0



35

55

10

–5

0



39

21

39

15

0



Export credit insurance

Increased

No change

Decreased

Mean change

Median change



32

49

20

3

0



39

43

17

–13

0



24

64

12

5

0



32

39

29

11

0



Trade-related lending

Increased

No change

Decreased

Mean change

Median change



47

23

31

11

0



56

15

30

25

0



41

38

21

–11

0



44

16

41

23

0



Average across products

Increased

No change

Decreased

Mean change

Median change



40

36

25

6

0



47

31

22

7

0



34

52

14

–4

0



38

25

36

16

0



Source: IMF and BAFT-IFSA 2010.

Note: CY = calendar year. Small banks = < $5 billion in assets; medium-size banks = $5 billion–$100

billion in assets; large banks = > $100 billion in assets. Mean figures are percentage changes in the

pricing margin above bank cost of funds. Mean and median figures do not include responses for which

detailed pricing data were not provided.



increased the relative competitiveness of the more conservative banks once Basel

II requirements are in effect.

In addition to capital requirements and banks’ costs of funds, the probability

of default decreased over the course of 2009, as shown in figure 5.15.

Most of the respondents indicated that there was no change in defaults. A net

of only 13 percent (the difference between the percentage reporting an increase

and the percentage reporting a decrease) reported an increase in default risk in

2009, against a net of 30 percent between the fourth quarter of 2007 and the

fourth quarter of 2008.



41



36



23



Q4 09 vs. Q4 08



letters of credit



Q4 08 vs. Q4 07



38



52



10



Sources: IMF and BAFT-IFSA 2010.



0



10



20



30



40



50



60



70



80



90



100



increases



no change



48



40



12



Q4 09 vs. Q4 08



46



23



31



short- and medium-term lending



Q4 08 vs. Q4 07



decreases



Q4 09 vs. Q4 08



31



49



20



export credit insurance



Q4 08 vs. Q4 07



29



62



9



Figure 5.13 Effect of “Recent Developments” on Pricing of Trade Instruments



percentage of respondents



110



Trade Finance in the 2008–09 Financial Crisis



Figure 5.14 Change in Trade Instrument Pricing

a. Q4 CY08 vs. Q4 CY07



basis points over cost of funds



80



60



40



48

20

31

14



de

-r

le elat

nd e

in d

g



tra



po

in rt c

su re

ra di

nc t

e



ex



le



tte

cr rs o

ed f

it



0



b. Q4 CY09 vs. Q4 CY08



basis points over cost of funds



80



60



40



20

11

6



3



Sources: IMF and BAFT-IFSA 2010.

Note: CY = calendar year.



-r

le elat

nd e

in d

g



de

tra



o

in rt c

su re

ra di

nc t

e



ex

p



le



tte

cr rs o

ed f

it



0



111