Trade Finance Gaps in a Heightened Regulatory Environment: The Role of Development Banks
| DOI | http://doi.org/10.1111/1758-5899.12715 |
| Author | Diana Smallridge,Jennifer Henderson |
| Date | 01 September 2019 |
| Published date | 01 September 2019 |
Trade Finance Gaps in a Heightened
Regulatory Environment: The Role of
Development Banks
Jennifer Henderson and Diana Smallridge
International Financial Consulting Ltd
Abstract
Trade is a fundamental human activity. However, the past decade has been characterised by increasing regulation and protec-
tionism. This paper explores the role of development banks as trade f‌inance policy tools in responding to regulation-induced
market failures. Towards this end, it discusses the impact of recent trends in banking regulation on small and medium enter-
prises (SMEs), f‌inancial institutions, and emerging economies.
Trade is a fundamental human activity. That societies have
f‌lourished throughout history due to their commercial trade
transactions is well known; the evidence of trade contribut-
ing to social and economic outcomes, standards of living
and degrees of economic inclusiveness are apparent around
the globe. Therefore, policies that facilitate a sound f‌inancial
system, and encourage trade, advantage every level of soci-
ety. However, the past decade has been characterised by
ever increasing regulation and protectionism. The 2007 glo-
bal f‌inancial crisis (GFC) ushered in a new wave of f‌inancial
and regulatory measures: governments backed f‌inancial sys-
tems, lending regulations tightened, and new supervisory
structures, bodies and agreements were established to
reduce the probability of any future systemic collapse. Now,
over a decade since these events, the outlook on trade
remains lackluster; trade f‌lows reached its lowest in 2016
and revenues in trade f‌inance declined from US$41 billion
(2014) to US$36 billion in 2016 (Ramachandran et al., 2017).
This paper def‌ines the role of development banks in
responding to regulation induced market failures. Working
towards this end, it will discuss the impact that recent
trends in banking regulation have had on small and med-
ium enterprises (SMEs), banks, and emerging economies
broadly in relation to trade f‌inance.
Regulation: its inf‌luence on trade f‌inance
Like other f‌inancial sector mechanisms, Trade Finance bene-
f‌its from policies that promote f‌inancial stability. However,
since 2007 banking regulation has expanded and intensif‌ied
around the world in the form of capital, leverage and liquid-
ity parameters as stipulated in the Basel Accords as well as
measures to mitigate illicit f‌inancial f‌lows through anti-
money laundering (AML) and counter terrorism f‌inancing
(CTF) procedures, laws or regulation. As a result, banks are
becoming better at managing more risks. This is a good
thing. The surge of regulatory activity in recent years has
built resiliency to the global f‌inancial system. Nevertheless,
it comes at a cost. ICC’s 2018 export f‌inance survey sug-
gested a large proportion (54 per cent) of export f‌inanciers
(banks and corporates) felt that legal and regulatory hurdles
were holding them back from doing business in new mar-
kets; fears relating to corruption (exposure to AML/CTF com-
pliance risk) were also of concern (42 per cent of
respondents) (Thompson, 2018). Banks face increases in cap-
ital reserve requirements and in compliance costs. The out-
come: ‘de-risking’. De-risking refers to banks terminating or
restricting their relationships with clients or categories of cli-
ents to avoid risk (World Bank, 2015). The International
Finance Corporation’s (IFC) 2017 Survey on Correspondent
Banking, issued to over 300 banking clients in 92 countries,
revealed that nearly one-third of participants experienced
decreases in their correspondent banking relationships
(CBRs); withdrawal of relationships in Sub-Sahara Africa had
the most pronounced impact (Starnes et al., 2017). In gen-
eral, emerging markets –where some banks surveyed by
the International Monetary Fund have stated they termi-
nated over 60 per cent of their correspondent banking rela-
tionships –are the most harmed by de-risking (IMF, 2017).
Where relationships have remained, many banks have set
new minimum activity thresholds, passing on higher costs
to respondents, or pressured respondents to limit their
exposure to certain ‘high-risk’categories of customers.
Impact on SMEs
Where the cost of due diligence is equally high, or compara-
ble for SME clients as it is to larger corporates, there is less
incentive for a bank to maintain low-return SME relation-
ships. Today, market gaps in trade f‌inance are particularly
©2019 University of Durham and John Wiley & Sons, Ltd. Global Policy (2019) 10:3 doi: 10.1111/1758-5899.12715
Global Policy Volume 10 . Issue 3 . September 2019
432
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