Can domestic trade credit insurance contracts be effective collateral for banks? A quantitative study of the Italian market

Abstract

A domestic credit insurance contract is a policy that covers the risk of the nonpayment of future commercial credit as a result of the failure to pay within the agreed terms and conditions (protracted default) or the insolvency of the buyer. To evaluate the effective level of financial protection offered by trade credit policies, we collected a database of contracts issued between 2006 and 2013 by a number of Italian insurance companies, which account for 80-85% of the Italian market. We find that, to be considered as able to mitigate credit risk, the policies must have their contract clauses changed. In that case, such a policy, if accepted by the supervisory authority, could permit banks to reduce the capital requirement connected with the discount of trade credits. These results are particularly important for insurance companies.

The financial and operational impacts of European SMEs’ use of trade credit as a substitute for bank credit

“…Ogawa et al (2013) and Yang (2011), have documented that trade credit is a useful alternative to bank credit whereby it offers a buffer for SMEs that are more financially constrained, but less is focused on its financial and operational impacts for both SME trade credit receivers and suppliers. This paper, as the first cross-country empirical study, extends existing literature by documenting the economic effects of both the use and supply of trade credit on SME 1 For a review of trade credit policy contract structure, please see Bazzana et al (2019). 3 performance, especially for those SMEs that have less access to bank credit and under the conditions of tightened bank credit supply.…”

Does Risk Disclosure Matter for Trade Credit?

“…Furthermore, firms usually suffer from bank credit-granting during the crisis and tend to use more trade credit (Chen et al 2019). For that, suppliers were considered as viable financing sources during the global financial crisis (Bazzana et al 2019) and play an important role in the survival of Small to Medium Enterprise (SMEs) during the crisis (Pattnaik et al 2020). Accordingly, it is interesting to investigate the association between risk disclosure and trade credit in the Tunisian context during 2008-2013, since it was a period characterized by economic and political instability.…”