Banks back further state intervention in trade finance market

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By:
Paul Golden
Published on:

Financial institutions have backed the International Chamber of Commerce’s call for governments to scale up their support for trade finance to meet post-coronavirus demand.

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According to the International Chamber of Commerce (ICC), around $5 trillion of trade credit will be required to facilitate a rapid recovery from the Covid-19 crisis.

Despite welcoming the actions taken during the initial phase of the crisis, the ICC says there is still a strong case for state intervention.

Christoph Gugelmann, chief executive at Tradeteq – which has called for a greater distribution of trade finance assets to non-bank investors – agrees that governments have to play their part in supporting banks to extend trade finance.

“Government-backed access to trade finance funds will support economic growth and international trade, and as this is based on the flow of tangible goods and products there is a relatively low risk of default,” he says. “Such support would alleviate financial pressures on small and medium-sized enterprises.”

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Michael Vrontamitis,
Standard Chartered
Michael Vrontamitis, head of trade Europe and Americas at Standard Chartered, says that without government intervention in backing trade credit insurers there will likely be a big reduction in credit in the market, which would make a recovery much harder and slower.

He adds: “Using public sector guarantees for trade credit insurance or trade finance is an effective way of increasing liquidity to vulnerable sectors of the economy and more effective than reducing interest rates as insurers and banks will reduce credit capacity (and therefore liquidity) where they see that their risks have increased.”

Added security

Lesley McNamara, global head of strategy in global trade and supply-chain finance at Bank of America Merrill Lynch, refers to steady growth across the bank’s supply-chain finance portfolio.

“Anything that adds security to a company’s supply chain is good for business continuity planning,” she says. “We have also been working with clients that already have supply-chain finance programmes by helping them diversify their supply chain, accelerate the onboarding of certain strategic suppliers and reduce their credit lines to match their actual use.”

Fiona Deroo, who is managing director in global trade structuring and supply-chain finance at Bank of America Merrill Lynch, observes that export credit agencies have been instrumental in stepping up to provide financing.

When public intervention can be a catalyst to solve market inefficiencies, it should be welcomed, says Jorge Tapia, Citi’s trade sales head for EMEA. “Those inefficiencies often have their origin in regulations, but the ICC has years of data to understand the risk profile of trade transactions and the correlation between trade finance and economic growth.

“That allows it to understand the risk/return inefficiencies and the type of solutions that are needed.”

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Bruno François,
BNP Paribas
Despite lockdowns causing serious disruption to trade flow operations the trade credit ecosystem has proved resilient, suggests Bruno François, deputy global head of trade finance and network management, BNP Paribas.

“Rapid adjustment by all players has enabled the system to continue to work, and to our knowledge no force majeure event has been raised,” he says. “We have adjusted our internal procedures and provided training to clients to help them find solutions for documentary credits and guarantees.”

Heightened risk has led to some private credit insurers withdrawing support for certain sectors or increasing premiums.

Helpful

The reduction of private-sector trade-credit insurance cover is one of the reasons governments (and multilateral export credit agencies) have stepped in.

“As trade-finance providers, some of the tools we use for managing risk are short-term credit insurance and non-payment insurance provided by private and public bodies to mitigate and manage our risk,” explains Natalie Blyth, group general manager and global head of trade and receivables finance at HSBC. “Therefore, this broad-based government intervention has been helpful.”

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Natalie Byth, HSBC
When it saw China shutting down in early February, HSBC was aware that many small companies had payments due between February and the end of April. In response, the bank automatically applied a 30-day payment extension to all clients, with the option to opt out.

“We have also worked with multilateral development banks to support exporters and importers, address disruptions in the supply chains and support their short-term trade-finance transactions,” says Blyth.

“However, more can and should be done to unblock access to trade finance, for example changing the capital treatment for bank lending to micro, small and medium sized enterprises as has been suggested in the forthcoming Basel III regulations,” she concludes.

The ICC says deferral of the full implementation of Basel III, together with helpful technical clarifications provided by the Basel Committee, will ensure that banks reflect the risk-reducing effect of government guarantee programmes when calculating regulatory capital requirements.