EXPORT FINANCE

Exports play a key role in the development of the European economy and are a key source of employment in the EU. More than 30 million jobs already depend on exports outside the EU. 90% of future global growth will happen outside Europe’s borders, and industry accounts for 80% of exports. European Banks are the main financiers of the European Economy (financing more than 70% of the external financing needs of the European corporates), and they are a key partner for companies in the continent and beyond that want to grow and trade beyond their national borders

The Export Finance market is a sometimes unknown but vital part of the economy, that ensures the viability of trade and the safe and balanced provision of credit that exporters and importers need in order to succeed in their businesses.

Be it on their own for long-term or short-term trade finance solutions, or in conjunction with the support of public Export Credit Agencies (ECAs), banks finance and guide customers forward in a way that they safely conduct their key activities and go out to the market in confidence.

The EBF engages in all the critical work happening in terms of ECA & Banking regulation through its Export Finance Working Group – composed of banking experts.

WHAT IS EXPORT FINANCE?

Export finance are all those transactions undertaken between a exporter / importer a bank, their counterparty and/ or insurance companies and Export Credit Agencies (when dealing with Export Credits) that ensure that an exporter and an importer can undertake their business in trust. The participation of financial intermediaries & insurance / public ECAs, guarantees the transaction is undertaken in good faith.

A short definition would be: Export finance, often referred to as “Trade and Export Finance” or “Export and Project Finance”, is the provision of dedicated funding and insurance products that reduce the risks of selling goods and services internationally (Acre Impact Capital / Rockefeller foundation).

The common products found in trade and export transactions are the following:

  • Import/ Export Letters of credit (L/C)
  • Loans for Import/Export (can be covered with credit insurance products)
  • Performance Guarantees and Standby Letters of Credit
  • Supply Chain Finance (Payables Finance)
  • Some instances of specific Project finance / Commercial finance
  • Products for which an ECA has provided a state-backed guarantee or insurance to the financing bank
  • Banks’ lending related to public credit risk transfers and political risk mitigation
  • Bank lending in public-supported trade facilitation transactions

Customers chose export finance solutions provided by banks as it is a safe and long-term financing business that entails very low risks of failing or defaulting (2019 ICC Trade Register data confirms this).

In addition, to support companies to export and thrive in a global economy, Export Finance is also a critical part of the development finance and sustainable finance agendas (with Export Finance having some of the highest ratios of sustainability / total transactions in the market. Given the high level of compliance and rules governing the transactions, all steps can be traced from importer to exporter, banks and ECAs, ensuring that transparency, public support interests and international agendas are complied with (see TXF / Acre Impact Capital).

For further data on ECA backed transactions, please see OECD and Berne Union.

HOW IS EXPORT FINANCE GOVERNED? – THE ROLE OF EBF

Banking Regulation at EU and international level (CRR/CRD/BRRD, Basel standards) and the OECD Arrangement governing ECA coverage rules are the two key areas were specific regulatory actions impact the provision of export finance. In addition, the ICC rules for international commerce and documentary credits, as well as its guidelines for formatting, demand guarantees and supply chain finance—help mitigate the risks involved in trade. Finally, associations like LMA and others help with the creation of standard documentation that eases these challenges even further.

Banks in addition at EU level, beyond compliance with the CRR, CRD & BRRD, they are bound by their national standards, EBA regulations and ECB compliance if regulated by it.

For ECAs, further rules apply: The WTO’s Agreement on Subsidies and Countervailing Measures (mandatory for signatory countries) that regulates the use of subsidies (most export credits are considered allowed subsidies as long as they are in line with the OECD Arrangement). EU Regulation No: 1233/2011 (legally binding for EU ECAs) – stipulates that the OECD Arrangement applies in the EU and sets out reporting measures – including how environmental risks are to be considered by EU ECAs. The Berne Union also agrees principles that its members (ECAs & insurers) apply.

We are also monitoring the advancements happening at the International Working Group (IWG) and its possible implications for ECA finance.

The EBF acts mainly upon both OECD Arrangement and Banking Regulation areas:

The OECD Arrangement

The Arrangement is a “gentlemen’s agreement” amongst its Participants, in place since 1978. . Since then, it has been regularly developed and updated to reflect Participants’ needs and market developments.

The main purpose of the Arrangement is to provide a framework for the orderly use of officially supported export credits by fostering a level playing field in order to encourage competition among exporters based on quality and prices of goods and services exported rather than on the most favourable officially supported export credits. The Arrangement places limitations on the financing terms and conditions to be applied when providing officially supported export credits as well as on the use of tied aid by the Participants. In addition, the Arrangement is complemented by 6 sector understandings that clarify sector-specific rules.

As the Arrangement passes its 40th birthday, it increasingly faces important limitations in light of key changes to the global trade and investment landscape. The changing environment has placed increasing pressure on the Arrangement and in some cases undermined its ability to fulfil its purpose, as evidenced by Participants seeking avenues to circumvent it by developing products outside the Arrangement. Today, Arrangement-regulated activity amounts to only 36%of the total Medium and Long Term Activities of Export Credit Agencies (ECAs).

A fundamental modernization of the Arrangement is much needed and must not be delayed. Making it fit for purpose while ensuring a global level playing field is essential, and there are several immediate updates of particular consequence for the business community that can be implemented now.

The COVID-19 pandemic has done nothing but increases the relevance of highly needed measures:

MUCH NEEDED IMMEDIATE UPDATES

a) Increase the current cover of local costs to 50% of total scope.
b) Allow market-reflective repayments to better align with the nature of different projects.
c) Increase the maximum repayment term to 18 years.

GUIDING PRINCIPLES FOR FUNDAMENTAL MODERNIZATION

a) Reaffirm the core purpose, which is to ensure a level playing field and to include all relevant instruments for finance (ECA, but also investment guarantees and development finance), of the OECD Arrangement to ensure it can continue as a vital multilateral tool and consider all official cross-border financing.

BANKING REGULATION

Banks are highly regulated entities, that need to comply at European and International level with various levels of complexity in the prudential and supervision aspects and balance sheet management. In this regard, the EBF Export Finance WG collaborates very closely with the Banking Supervision Committee and other groups dealing with the specificities of Prudential and Supervision regulation.

Export Finance transactions fall generally on lending, and as such, it is governed by the overall principles applied to these transactions, including specific provisions in the EBA Guidelines on loan origination and monitoring.

The Capital Requirements Regulation & Capital Requirements Directive governs prudential requirements for credit institutions and investment firms as well as the access to the activity of credit institutions.

Article 47c / 213 – Non-Performing Exposures – Revision of provisioning calendar for export credit exposures

We have been calling for policy makers to give a more appropriate recognition of export credit insurance. As also remarked by the EBA in their Policy advice on the Basel III reforms: Credit risk of August 2019, it would be desirable to align article 213 CRR (see drafting proposal below) with the Basel standards on the treatment of guarantees, which grants the possibility for the guarantor to either make a lump sum payment or assume future payment obligations of the defaulted obligor. This would lead to a more sensible use of prudential provisions, which is particularly relevant given the current situation.

Article 429a– Leverage Ratio:

In order to enhance the effectiveness of the European Commission’s economic support programme and banks’ ability to finance European corporates, we would suggest adjusting the leverage ratio to allow all sovereigns with a  lower credit rating to also benefit from the leverage ratio adjustment.

This would mean that exposures backed by ECA guarantees would be treated equally across EU countries disregarding their country risk categorization. This action would greatly even out the playing field for both currencies and risk weights – allowing to maintain the competitiveness of sovereigns of all countries, especially those that would be impacted negatively by the current wording.

Articles 55, on trade finance off-balance instruments

These instruments are letters of credit and technical guarantees which are off-balance contingent liabilities and which are used to secure payments in the financing of trade.

According to the information collected in various BCBS countries, the introduction of a “bail-in” clause in these documents, through the Article 55 would only be requested in the EU. It put at risk EU companies when they compete with non-EU companies, as the banks of the formers will issue documents without such a mention; discrepancies with the models provided in a tender process may cause disqualification.

EBF POSITION PAPERS
EBF Adviser
Daniel Bouzas

Daniel Bouzas

Policy Adviser - Financing Growth