Market Adjustment versus Market Failure
267
attached—is at risk of being used for recapitalization rather than lending. This risk can be overcome by asking the banks to set up special-purpose trade finance vehicles that would be required to use the new liquidity or risk capacity solely for financing trade with emerging markets. Holistic response
Without corresponding measures to address wider liquidity issues of banks and to stimulate lending for investment and working capital purposes, neither the banks nor their customers who participate in the trade finance market will be healthy enough to do so. Integration with existing institutions
Most trade finance operates within fairly well-established institutional relationships, using simple products such as LCs. Effective interventions in past crises have generally worked within these existing market practices and documentation and did not seek to reinvent mechanisms or to apply unduly complicated documentation or practices. Collective action
The interdependencies in the financial system, more than ever, demand a coordinated effort to revive trade finance flows. Coordinating national interventions could send a powerful signal to market participants that could help restore confidence and eventually lower the overall cost of public intervention. Coordination at the regional level can also be effective. For example, the Asia-Pacific Economic Cooperation established the Asia-Pacific Trade Insurance Network at the end of 2008 to facilitate regional trade. The international community appears to have recognized the importance of such coordination, and initiatives coming out of the G-20 meeting in London have adhered to this approach. Balance of risk and liquidity support
The current crisis requires interventions that address real liquidity constraints (for banks and firms) as well as those that perceived escalation of counterparty risk. A combination of ring-fenced funding to support trade finance loans as well partial guarantee programs (like the IFC’s Global Trade Finance Program) that help offset the heightened risk premium in the current market may be effective to catalyze trade finance lending. Importance of developed-market banks to emerging markets
Without attention to international banks’ involvement in trade finance and acknowledgment of their huge distribution power and networks as fundamental