While the causes of the global credit crisis have been pinpointed and stimulus actions taken by countries all over the world, credit, lending and especially trade finance have remained tight. Banks and insurers are still leery of financing business transactions, both domestically and internationally, and those that have the taste for it often require onerous fees to stem their potential exposure.
“Banks are requiring collateral now, the fees are much higher, especially if you’re not rated or noninvestment grade,” said David Gustin, managing partner at Global Business Intelligence Corp. Gustin recently led an FCIB teleconference, titled “Trade Finance in Crisis,” in which he illuminated the current state of the global financing market for a rapt group of attendees who hailed from 12 different countries around the globe.
In addition to tightened credit policies, Gustin noted that regulation had taken its toll on the banking sector and its willingness to lend. “Banks are not lending because of Basel II capital issues and because they’ve tightened their credit policies,” he noted. “Basel II sucks out what capital is available to support trade and creates a capacity issue.” The Basel II regulations dictate how much capital banks need to set aside to protect from various types of risk. Money kept for this purpose is geared toward safeguarding the institution from insolvency, and meeting the Basel II requirements means banks have to use their capital for compliance rather than for lending.
The outlook for the future of trade finance is relatively brighter, but the details of the current situation don’t necessarily show any major form of relief coming in the near-term. “While the outlook for the credit markets is showing some improvement, credit availability remains tight,” said Gustin. “Companies have borrowed more from the bond market than from the banks and the focus has been to lock in cheap long-term funding.” In addition to increased reliance on bonds, underwriting standards at banks have also risen across the board, and banks have found that they have very little incentive to lend.
Creditors tired with the world’s thrifty banks have turned both to the bond market and to the insurance market, which is also facing major constraints. Gustin noted that insurers’ underwriting capacity for trade credit and political risk has been significantly limited, with a loss ratio exceeding 100% for multi-buyer insurance policies and 200% for the single risk structured trade credit market. Rate increases have also bedeviled policies with poor loss ratios, as Gustin noted that struggling policyholders could see their rates triple should their provider deem it necessary. Source: NACM; courtesy Jacob Barron, NACM staff writer 12/16/2009
BIIA Newsletter January 2010 Issue