Rise of the multilaterals

Possibly the defining feature of the financial crisis in relation to trade finance has been the increased importance of multilateral institutions such as the International Finance Corporation and national export credit agencies. At the G20’s prompting, a plethora of support schemes and guarantees were created while the remits of various national and multinational bodies were widened. For example, while historically the IFC has been charged with growing the private sector, it now specifically addresses emerging markets. “The crisis shows that world institutions can rise to the occasion with solutions such as the IFC’s Global Trade Liquidity Programme, which is designed to support trade in developing countries,” says Tan Kah Chye, global head of trade finance at Standard Chartered. “Other multilaterals such as the Opec Fund for International Development have expanded into areas they never previously addressed. Overall, it is a positive development that public/private partnerships have been deepened.”

As a result of the crisis, export credit agencies’ participation in risk sharing and the diversity of their offerings and involvement in trade finance has increased, agrees Adnan Ghani, head of trade finance at RBS. “Of course, multilaterals are large institutions that take time to change direction so it is too early to say if their strategies have been successful. Whether ECAs’ expanded role will become a permanent feature of the market depends on take-up.”

Many of the programmes introduced during the crisis have a finite life: for example, the IFC’s landmark guarantee programme, which covers risks for banks offering trade finance, only extends to three years and it is unlikely to be extended in the long term. Nevertheless, the requirement for multilateral bodies such as the IFC to take such a comprehensive role in enabling trade finance – and for export credit agencies to step up their activities – raises questions about banks’ ability to adequately serve global trade.

Unsurprisingly, trade finance bankers deny that they have reneged on their responsibilities. Paul Simpson, global head, treasury and trade solutions at Citi, says that non-bank actors have played a critical role in maintaining trade finance during the crisis. However, he says that there should be a debate about the mandate of supranationals. “Are they there to ensure that good trade flows get covered in difficult times or to take on risks that won’t get covered because the banking system sees them as bad risks?”

Another senior trade finance banker, who declined to be named, notes that as a result of government and multilateral involvement in trade finance, the business will inevitably be less lucrative. “That’s why banks won’t just rely on government guarantees and will gradually recolonize other areas of trade finance, taking what they perceive to be the right risks at a given time,” he says.

There are also areas where some observers would like to see still greater involvement by export credit agencies and other market participants. Kah Chye notes that while LCs account for as little as 5% of world trade by some estimates, they are supported by 200 banks (which control 80% of the market). “For the remaining 95% of global trade, there are just three global underwriters of credit insurance: Coface, Euler and Atradius,” he notes. “There is clearly a structural problem in that there are not enough providers of international credit.”

Many observers believe that the only way the credit insurance market will expand is with the assistance of export credit agencies. “Credit insurance needs to grow and become less conservative,” says Daniel Schmand, head of trade finance, EMEA, at Deutsche Bank. “It would be beneficial for ECAs to step into that market to provide additional help and capacity. The more banks can offload parts of the risk they originate the more they can take on and the more fluid trade becomes.”