At present, some European commercial banks mostly incorporate international trade financing into the unified credit management of customers. Under the unified credit management, banks often approve a maximum comprehensive credit line for customers according to their credit status and financial status, and approve a sub-line of credit line for customers according to different types of credit business. However, the new forces engaged in international trade financing business, trade enterprises and small and medium-sized enterprises, are generally small in scale, which makes the traditional technical analysis of corporate finance greatly reduce the guiding significance of their credit line measurement. For small and medium-sized enterprises, although they do not consider the statement situation, they only focus on effective real estate mortgages. It can be seen that most of the strategies chosen by domestic commercial banks in the treatment of trade enterprises and small enterprises in trade financing are too simple and have not kept up with the “beat” of the development of international trade financing.

Some commercial banks’ international trade financing business approval methods lack differences with traditional credit approval methods and approval priorities, and their timeliness is weak, which cannot meet business needs. Once the credit line is approved, they simply handle business within the credit line within one year, rather than adjusting the credit line at any time according to the business changes of the enterprise. Moreover, it lacks effective post-loan management, and does not make full use of the characteristics of trade finance to strengthen the supporting management of capital flow and goods flow.

Under the traditional credit evaluation model, some banks only pay attention to the financial ability of enterprises, and lack the preliminary investigation on the trade background and upstream and downstream situation of enterprises. At present, sub-branch account managers rarely go to enterprises for field investigation and research, and their understanding of enterprises only remains on the information provided by enterprises, especially the operation of upstream and downstream enterprises is lacking, and some even do not know much about the use of imported goods. Such information asymmetry will bring great risks to the financing of each bank.

At present, many commercial banks have no post-loan management methods for trade finance business, and most account managers still manage trade finance business according to the traditional post-loan management mode. This creates two risks: First, once the enterprise defaults, the goods as the first source of repayment may have been disposed of by the enterprise; Second, even though the bank has the real right in its hands, it lacks the ability and experience to dispose of the real right, so it can only carry out property preservation through recourse guarantee in the end, and is in a relatively passive situation. In fact, the characteristic of trade finance business is to prevent risks by its business process itself. While strengthening the regular audit of the business status and financial status of trade finance enterprises, special emphasis is placed on post-loan management combined with the business characteristics of trade finance. On the other hand, in the aspect of post-loan management, the responsibility of international business personnel and credit management personnel is not clearly defined, and it is easy to shirk each other.

The financing business of many commercial banks in international trade is mainly concentrated in large and medium-sized enterprises, and these companies have rich experience in international trade. Large multinational trading companies generally have good credit, strong technology and good solvency. Banks, for their part, are more willing to borrow because their exposure to international trade finance is relatively low. In stark contrast, small trading companies have very little access to bank international trade finance. In addition, there are also unreasonable problems in the international trade financing structure of commercial banks, in which medium and long-term loans account for a large proportion, and the imbalance between medium and long-term loans and short-term loans will increase their credit risks.

At present, the legal system of international trade financing is not perfect. Compared with the United States and other countries, Europe’s position in foreign trade is in the forefront of the world, but there are still deficiencies in related supporting laws and regulations. In the foreign trade business, due to the existence of many legal problems, so in the international trade financing business, if there are some difficulties, it is difficult to formulate corresponding laws and regulations in a timely manner to protect their legitimate interests.

Although commercial banks have many international financial products most of them are carried out in a specific way. Because there are not too many customers many banks do not want to take too much risk so their products are becoming less and less. In addition commercial banks in many countries have learned from foreign experience in international trade financing and lack financial products adapted to their own characteristics so their products are not attractive.

Trade finance business is time-sensitive and a fast approval process is the key to getting business. The trade finance business should pay more attention to the authenticity of the trade background and the continuity of the trade, the review of credit records, counterparties, banks’ post-loan management and operational procedures, and pay attention to the sales revenue generated by the trade process, as well as the strict match between the term and the trade cycle. Taking the trade finance credit line as a reference value, the trade finance business should be comprehensively and dynamically managed according to the characteristics of the business itself.

The evaluation of credit limit should not only focus on some traditional indicators of financial statements but should take the financial indicators such as accounts receivable turnover rate which can better reflect the business characteristics of trading enterprises as the standard to measure the credit limit of enterprises .We will strengthen the timeliness and flexibility of trade finance line of credit ratings. In view of the characteristics of rapid price fluctuations of imported commodities, change the idea of one year review in the past, can be half a year review, can also be quarterly review, midway can be added or reduced at any time; It is more flexible to give customers temporary single credit by participating in the formulation of enterprise trade process and the control of goods rights. When accepting trade finance business, it is necessary to take the credit line approved on the basis of static data as a reference value to carry out dynamic review of various financial indicators of trading enterprises. The credit line should be the upper limit on the risk control of various financing and guarantees of enterprises, rather than the exposure target that banks strive to achieve.

In view of the uncertainty of international trade finance business risk as well as the complex trade background and bill settlement background trade finance business review must adhere to the dynamic principle. If you simply use the credit line regardless of the changes in the enterprise it and the environment commercial banks will eventually force themselves into a passive position.

The preliminary investigation of international trade financing business is of great significance to the risk control of trade financing. Through the investigation of trade authenticity upstream and downstream conditions and transaction prices banks can effectively understand the background of corporate trade financing and effectively control risks. Strengthen trade background checks. The more comprehensive the customer’s production and operation, the lighter the degree of information asymmetry between banks and enterprises, the more conducive the bank to reduce business risks. The account manager should visit the customer frequently, master the main business of the customer, understand the market conditions of imported commodities, be familiar with domestic and foreign trade policies and international non-tariff barriers and other industry trends, and master the potential risks of trade finance business.

The compensation of international trade financing itself is the biggest feature that distinguishes it from general loans. As far as a single enterprise is concerned, its main banks often face only one end of the trade flow, and it is obviously futile to try to grasp the whole trade process from only one end of the trade flow. In that case, the operating conditions of an individual enterprise have to be taken as the main basis for investigation. Nowadays, with the further acceleration of the internationalization of commercial banks, banks have the ability and conditions to make use of the characteristics of trade flow and the means of closed management, through the cooperation of domestic and foreign institutions, monitor the import and export parties, and grasp the flow of goods and capital in the process of trade, so as to prevent risks and improve the overall income.

On the basis of insisting on dynamic examination and approval, it is necessary to establish an effective post-loan dynamic tracking and management system according to the characteristics of each trade finance product. The establishment of such a system should be reflected in at least two aspects, one is to dynamically monitor the production and operation activities of the enterprise itself, including tracking the possible impact of changes in the market environment on the enterprise; Second, once a risk occurs, or when it is determined that a risk is about to occur, the key to establishing an emergency plan is to protect bank assets from or less losses as much as possible.

Trade finance is a commodity for banks to control. Therefore, mastering the right to goods is extremely critical in trade financing, and the monitoring of goods, banks have human and material resources cannot reach the place, so we can consider introducing third-party supervision, on behalf of banks to supervise the collateral, which is the key to control risks. The bank should also examine the credit of the enterprise itself and the realization ability of the pledge, once the price of the goods fluctuates greatly, it should require the enterprise to add the issuing deposit or the bank to dispose of the pledged goods in time.

Strengthen the linkage mechanism within the industry to prevent potential risks. If both the import and export sides of the trade handle business in the same bank, the linkage mechanism within the bank is conducive to the bank to timely understand the situation of upstream and downstream enterprises, accurately judge the authenticity of the trade background, and at the same time, once the credit risk occurs on both sides of the trade, early measures are taken to check and stop the leak; Coordinate all aspects of the force, reasonable division of labor, cooperate with each other, up and down linkage.

Strengthen business training and job rotation training for international business practitioners, and actively do a good job of joint training with credit management, corporate business, personal finance business, asset risk management and other departments, and strive to cultivate compound talents who truly meet the needs of domestic commercial banks’ international business development; It is necessary to institutionalize the early investigation of trade financing for account managers, strengthen the international business training for bank account managers, formulate measures to assess the knowledge and ability of account managers in international business as soon as possible, and improve the professional skills and risk prevention awareness of bank account managers in international business.

The volatility risk of high-scale derivatives is concentrated in large banks. Financial derivatives have the inherent characteristics of high volatility and high leverage. European and American banks have high derivatives scale and are concentrated in large banks, which is a potential important risk and hidden danger. First, the nominal scale of derivatives contracts of European and American banks is about 10 times of their total assets; Second, the derivatives risks of European and American banks are mainly concentrated in large banks; Third, the proportion of derivatives central clearing contracts decreased after the epidemic, and the risk of default increased; Fourth, interest rate and foreign exchange derivatives contracts account for more than 90%, and the value is facing the risk of sharp fluctuations; Fifth, European banks’ credit exposure to derivatives has increased relative to their total capital.

Commercial real estate adjustment risk is concentrated in small banks. As an interest rate sensitive asset the impact of the interest rate hike cycle and falling demand on commercial real estate prices may trigger new risks for small and medium-sized banks: first  after the global financial crisis in 2008  the price of commercial real estate in the United States rose twice as much as nominal GDP  higher than before the global financial crisis. Commercial real estate prices have deviated significantly from economic fundamentals and interest rates are about to impact the commercial real estate market from three aspects: valuation cash flow and financing. Commercial real estate prices will continue to face greater pressure. Second about 50% of U.S. commercial real estate debt is held by banking institutions and falling commercial real estate prices tend to resonate with banking risks. Third nearly 70% of the commercial real estate loan risk in the U.S. banking industry is concentrated in small banks and the deterioration of their asset quality will have a significant impact on the profitability and willingness of these banks to lend. Fourth from the vacancy rate CMBS non-performing rate commercial real estate turnover and other indicators office real estate risk is higher is a potential risk point in the field of commercial real estate. Europe and the United States have a close relationship with business investment and large fluctuations in the United States will bring large fluctuations to the situation in Europe.

Since March 2023, the risk of the European banking industry has continued to ferments and spread, involving banks from small and medium-sized banks to large banks, causing widespread market concerns about economic and financial risks. From the perspective of the reasons for risk exposure, relatively aggressive business strategy, absence of risk control mechanism and mismatching of assets and liabilities maturity are the main reasons for the first outbreak of risk in the involved banks. However, from a macro perspective, the European Central Bank continues to raise interest rates sharply to reduce inflation, leading to a systematic flattening of the interest rate curve and even an inversion, which impacts the business model of banks borrowing short and lending long, and is the deep-seated reason for the concentrated exposure of European and American banks’ risks.

Generally speaking, long-term interest rate = short-term interest rate + term premium, which is usually linked to central bank monetary policy, and term premium is more determined by the economic outlook. In the process of raising interest rates, the short-term interest rate will follow the policy interest rate upward. However, due to the relatively lagging inhibitory effect of the interest rate hike on demand, the central bank’s interest rate hike will intensify the market’s pessimistic expectations on economic prospects, which will lead to the decline of term premium and the flattening of the interest rate curve. If expectations for economic growth shift from pessimism to recession, there is a high probability that the interest rate curve will shift from flat to inverted, meaning that long-term rates are lower than short-term rates. Affected by the accelerated recovery of overseas economies after the epidemic and the rising and strong resilience of inflation, the speed and extent of interest rate hikes by the world’s major central banks since the second half of 2022 have reached a new high since 1980, directly leading to the inverted yield curve of long-term and short-term Treasury bonds in major economies such as Europe and the United States.

Commercial banks usually adopt the business model of “short deposit and long loan” term mismatch to obtain certain profits, that is, banks support long-term loans by continuously absorbing short-term deposits. The sustained low interest rate environment in the world after the 2008 financial crisis has provided a suitable liquidity environment for the expansion of the above business model, which has become the main source of profits for commercial banks in major economies. Since 2022, the large and rapid interest rate hikes by the central banks of major economies have flattened and inverted the curve of short and long interest rates, which has had an impact on the profit model of banks.

From the perspective of liabilities, the rise of short-term market interest rates leads to a decline in the attractiveness of bank deposits, and bank deposits face loss or are forced to raise interest rates, resulting in an increase in the cost of liabilities. From the asset side, the inverted interest rate curve caused by the interest rate hike will make bank assets face multiple pressures: First, part of the loans issued by banks adopt fixed interest rates, and the interest rate remains unchanged for a long time. If the interest rate curve is inverted, the income from these stock assets will not cover the cost of funds, causing banks to suffer losses; second, the inverted long-term and short-term interest rate curve will compress the deposit and loan spread space, and the willingness of banks to increase credit supply will decrease. In addition, the upward interest rate will directly inhibit the consumption tendency and investment willingness of the private sector, resulting in a decline in credit demand and a passive slowdown in the expansion of bank assets. Third, rising interest rates will also lead to a decline in collateral value, worsening business conditions, and the non-performing loan ratio of stock loans may face certain upward pressure.

Financial derivatives are financial innovation tools based on traditional basic assets such as currencies, interest rates and stocks. Commercial banks usually hold a certain amount of derivatives to achieve the purpose of risk hedging and risk management. However, in practice, financial derivatives have high risks due to their value derivatives, trading leverage, design flexibility, structural complexity, form vitality and other characteristics. If they are used improperly or the underlying assets fluctuate greatly, huge risks are likely to occur.

According to the data of the US Monetary Audit Office and the European Central Bank at the end of 2022 the fair value of derivatives assets held by commercial banks in the United States and the euro area accounted for 11.9% and 8.4% of the total assets respectively. Although it was significantly lower than that of the financial crisis in 2008 it was affected by the continuous exposure of interest rate risks caused by the global super interest rate hike cycle in 2022. A large number of commercial banks increased their holdings of derivatives to hedge interest rate exchange rate credit and other risks and the proportion of derivatives assets of European and American banks increased compared to the end of 2021.

Although the size of a derivative contract is not the same as its risk exposure, in times of market panic, derivatives contracts are prone to self-reinforcing expectations, and the market risk and default risk cannot be underestimated. Especially in the context of global geopolitical tensions, increasing downward pressure on the economy, intensifying financial market turbulence, and easy reversal of expectations and self-strengthening, not only the price volatility risk of highly leveraged derivatives assets is large, but also induce the market to sell high-quality assets to supplement liquidity, so that the price of high-quality assets will be significantly adjusted, and the requirements of Basel III series regulatory indicators will be exceeded. The banking system will “go bad” faster than expected. As a result, high derivatives contract sizes could become the next financial risk tipping point for US and European banks.

In terms of European banks, after the epidemic, the scale of European banks’ derivative risk exposure increased generally, from 666.7 billion euros at the end of 2020 to 826.9 billion euros at the end of 2022, and the proportion of their derivative risk exposure in the total capital increased from 43.3% to 49.8% during the same period, and the degree of resistance of European banking capital to derivative risks decreased (see Figure 22). In addition, in terms of size, the derivatives credit risk of the two major economies in Europe and the United States showed a structural feature of “large banks are higher than the whole”, but after the epidemic, the proportion of derivatives risk exposure of important global systemic banks in the total capital decreased, deviating from the overall performance, indicating that the derivatives credit risk of small banks increased rapidly after the epidemic, which is worthy of attention.

By Yiqi Wen