Credit Chains and Production Networks
There are three kind of flows in a Supply Chain
- Goods
- Information
- Financial
Credit Terms in a Supplier Buyer contracts determine payment delays which accumulate in current accounts of a Firm.
- Account Receivables
- Account Payables
Credit Relations
- Bank to Bank
- Bank to Firm
- Firm to Firm
Dyad of Credit Relations
- Supplier – Buyer
Triad of Credit Relations
- Supplier – Bank – Buyer
Sources of Systemic Risk
- Failure of a Firm and its impact on Suppliers and Customers (Flow of Goods)
- Failure of a Bank and its impact on Trade Credit
- Credit Contraction due to de-risking by the Banks
- Decline in Correspondent Banking relations and its impact on Trade Finance
From Credit Chains and Sectoral Co-movement: Does the Use of Trade
Credit Amplify Sectoral Shocks?
Trade credit is an important source of short-term financing for firms, not only in the U.S., as documented by Petersen and Rajan (1997), but also around the World. For instance, accounts payables are larger than short-term debt in 60 percent of the countries covered by Worldscope. Also, across the world most firms simultaneously receive credit from their suppliers and grant it to their customers, which tend to be concentrated on specific sectors. These characteristics of trade credit financing have led some authors to propose it as a mechanism for the propagation and amplification of idiosyncratic shocks. The intuition behind the mechanism is straightforward; a firm that faces a default by its customers may run into liquidity problems that force it to default to its own suppliers. Therefore, in a network of firms that borrow from each other, a temporary shock to the liquidity of some firms may cause a chain reaction in which other firms also get in financial difficulties, thus resulting in a large and persistent decline in aggregate activity. This idea was first formalized by Kiyotaki and Moore (1997) in a partial equilibrium setting, and has been recently extended to a general equilibrium environment by Cardoso-Lecourtois (2004), and Boissay (2006) who have also provided evidence of the potential quantitative importance of the mechanism by calibrating their models to the cases of Mexico and the U.S., respectively.
From Ontology of Bankruptcy Diffusion through Trade Credit
Channel
A supply network is a network of entities interacting to transform raw material into finished product for customers. Since interdependencies among supply network members on material, information, and finance are becoming increasingly intensive, financial status of one firm not only depends on its own management, but also on the performance and behaviours of other members. Therefore, understanding the financial flows variability and the material interactions is a key to quantify the risk of a firm. Due to the complex structure and dynamic interactions of modern supply networks, there are some difficulties faced by pure analysis approaches in analyzing financial status of the supply network members and the high degree of nonlinear interactions between them. Mathematical and operation research models usually do not function very well for this kind of financial decision making. These models always start with many assumptions and have difficulties modeling such complex systems that include many entities, relationships, features, parameters, and constraints. In addition, traditional modeling and analysis tools lack the ability to predict the impact of a specific event on the performance of the entire supply network. Current financial data analysis with large volumes of structure data cannot offer the full picture and intrinsic insights into the risk nature of a company. Motivated by the literature gap in risk monitoring in investment background and limitations of analysis approaches for handling bankruptcy contagion phenomenon, we propose an ontological approach to present a formal, shared conceptualization of this domain knowledge.
From Inter-Firm Trade Finance in Times of Crisis
The severe recession that is hitting the global economy, with very low or even negative growth rates, has caused widespread contractions in international trade, both in developed and developing countries. World Trade Organization (WTO) has forecast that exports will decline by roughly 9% in volume terms in 2009 due to the collapse in global demand brought on by the biggest economic downturn in decades. The contraction in developed countries will be particularly severe with exports falling by 10%. In developing countries, which account for one-third of world trade, exports will shrink by some 2% to 3% in 2009.
The contraction in international trade has been accompanied by a sharp decline in the availability of trade finance. This decline is only partly explained by the contraction in demand: according to a BAFT (Banker’s Association for Trade and Finance) and International Monetary Fund (IMF) joint survey (2009), flows of trade finance to developed countries have fallen by 6% relative to the previous year, more than the reduction in trade flows, suggesting that part of the fall reflects a disruption of financial intermediation. The contraction in value of trade finance has also been accompanied by a sharp increase in its price. Fear that the decline in trade finance and the increase in its cost would accelerate the slowdown of world trade has triggered a number of government initiatives in support of trade finance (Chauffour and Farole,2009).
The situation is especially worrisome for firms operating in developing countries which rely heavily on trade finance to support both their exports and imports.1 With a restricted access to financing and an increased cost of financing, these firms may find difficulties in maintaining their production and trade activities.
Please see my related posts:
Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)
Production Chain Length and Boundary Crossings in Global Value Chains
Intra Industry Trade and International Production and Distribution Networks
Understanding Trade in Intermediate Goods
Trends in Intra Firm Trade of USA
Production and Distribution Planning : Strategic, Global, and Integrated
Development of Global Trade and Production Accounts: UN SEIGA Initiative
The Dollar Shortage, Again! in International Wholesale Money Markets
FDI vs Outsourcing: Extending Boundaries or Extending Network Chains of Firms
The Collapse of Global Trade during Global Financial Crisis of 2008-2009
Understanding Global Value Chains – G20/OECD/WB Initiative
Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative
Oscillations and Amplifications in Demand-Supply Network Chains
Contagion in Financial (Balance sheets) Networks
Key Sources of Research:
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Nobuhiro Kiyotaki
London School of Economics
John Moore
Edinburgh University and London School of Economics
27 November 2001
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Nobuhiro Kiyotaki (Princeton University)
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Fabrizio Coricelli
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Jason Roderick Donaldson , Eva Micheler
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Supply chains and credit-market shocks: Some implications for emerging markets,
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Aggregate Fluctuations and the Role of Trade Credit
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Supply Chain Disruptions and Trade Credit
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Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity
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Financial Frictions in Production Networks
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Trade Credit, Financing Structure and Growth
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The impact of corporate distress along the supply chain: evidences from United
States
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Does credit crunch investments down?
New evidence on the real eects of the bank-lending channel
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University of Hyogo
TERAI Masaaki
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Turnstone Research Institute, Inc.
SOUMA Wataru
Nihon University
Operational causes of bankruptcy propagation in supply chain
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Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms
Shaowen Luo
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From Micro to Macro via Production Networks
Vasco M. Carvalho
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Trade Credit and the Propagation of Corporate Failure: An Empirical
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CREDIT MARKET DISRUPTIONS AND LIQUIDITY SPILLOVER EFFECTS IN THE SUPPLY CHAIN
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The origins of scale-free production networks
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Financial Instability after Minsky: Heterogeneity, Agent Based Models and Credit
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Measuring the Systemic Risk in Inter firm Transaction Networks
Makoto Hazama
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Anna Ledwoch, Alexandra Brintrup, J¨orn Mehnen, Ashutosh Tiwari
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TRADE CREDIT DEFAULTS AND LIQUIDITY PROVISION BY FIRMS
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Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?
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LIAISONS DANGEREUSES: INCREASING CONNECTIVITY, RISK SHARING, AND SYSTEMIC RISK
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Uncertainty and Costs of Financial Distress
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2746645
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734682
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http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.715.5812&rep=rep1&type=pdf
Supply Chain Management: Supplier Financing Schemes and Inventory Strategies
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Foreign Investment and Supply Chains in Emerging Markets: Recurring Problems and Demonstrated Solutions
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CREDIT CHAINS AND THE PROPAGATION OF
FINANCIAL DISTRESS
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by Frederic Boissay
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Credit Contagion and Trade Credit Supply:
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The Price of Complexity in Financial Networks
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The Price of Complexity in Financial Networks
S. Battiston
2017
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Viewpoints which Matter 