The United Nations (UN) has committed to review the trade financing gap and its underlying causes as part of its annual assessment of progress in mobilising finance to support sustainable development.
“We note that many micro, small and medium-sized enterprises are not benefiting sufficiently from the international trading system, and have difficulties integrating into global value chains,” says the UN in an intergovernmental text issued today following its 2017 Financing for Development Forum.
“We note the US$1.6tn shortage in trade finance provision reported by the Asian Development Bank (ADB) and the International Chamber of Commerce (ICC) and invite the Inter-Agency Task Force (IATF) to review the trade financing gap as part of its 2018 report.”
According to the ICC, the “chronic” shortfall has come about largely on the back of the unintended effects of global financial crime regulation. It points to various studies, including results from its own survey, that show that many global banks have begun to exit correspondent relationships in perceived high-risk regions.
While the trend in declining correspondent banking is not a new one in the sector, the reality of it for some countries is stark. In Argentina, for example, the number of correspondent banking relationships held by Argentinian banks dropped from 64 in 2009 to just 13 in 2016.
According to the ICC, some countries are now down to a single correspondent banking relationship and risk being entirely cut off from the international finance system. These include the Central African Republic, Nicaragua and the Solomon Islands.
“This is the first time the international community has recognised that there is a problem in the trade finance market and quantified it – we have moved the needle from statements on the value and importance of trade finance to acknowledge that there is a problem and that it is pretty big,” a spokesperson for the ICC tells GTR.
“The IATF brings together all the key players in the financial ecosystem. It now has a clear mandate, led by the UN secretariat, to look at trade finance.”
Going forward, the ICC says there are three priority areas the UN mandate should focus on.
“The first is correspondent banking and derisking which is clearly driven by AML and financial crime compliance. There is now an opportunity to bring together key players in this field and put forward a concerted way of addressing this,” says the spokesperson.
“Second is the residual issues on the capital front with regards to Basel III and IV. This will provide an opportunity to look at those too. The third priority should be ways to develop the market, building on the World Trade Organisation’s efforts on capacity building in developing economies – the UN may wish to look at the role of securitisation and other instruments for supporting access to trade finance.”
China fills the gap
But while western banks may be shying away from correspondent banking, the opposite is true of the east, namely China. Recent research shows that since 2009, Chinese banks have grown their correspondent banking relationships by 3,355%.
Research from AML software provider Accuity shows that in 2009, Chinese banks had just 65 correspondent banking relationships. This grew to 2,246 in 2016. Over the same period, the global trend was a 25% decline.
European banks, for instance, had 123,056 correspondent banking relationships in 2009, when the full enormity of the financial crisis was being realised. This fell away to 70,292 last year.
Short-term financing is an essential tool to support small business growth and sustainability, and growing trade finance shortfalls often hurt companies and countries that need it the most. Access to trade finance is generally recognised to be key to both the outlook of global growth and the fulfilment of the UN sustainable development goals (SDGs).