Trade distribution, where banks transfer the risk of trade finance deals to other institutions, has evolved over the past 25 years. Previously limited to risk-sharing between banks, it now increasingly involves insurers, reinsurers, and institutional investors, making it a key approach for freeing up bank capital and addressing the $2.5 trillion global trade finance gap.

At the 51st Annual International Trade and Forfaiting Association’s (ITFA) Conference in Singapore, Mahika Ravi Shankar, Deputy Editor at Trade Finance Global (TFG), sat down with Nicolas Langlois, the Global Head of Trade Distribution at Standard Chartered, to discuss how trade distribution has transformed over the years, the innovations that are shaping the market, and the challenges that lie ahead. 

For Langlois, a striking shift has been how regulations have reshaped the way banks distribute risk.

From Basel to balance sheet optimisation

Banks cannot give out unlimited loans. The Basel Accords – developed in the early 1980s by the Basel Committee on Bank Supervision (BCBS) – ensure that when giving out a loan, banks hold adequate capital as a safety cushion. In practice, this means once a loan is made, it sits on the bank’s balance sheet, exposing the bank to the risk of default. 

Basel I originally ensured that banks must maintain capital of at least 8% of their risk-weighted assets, thereby making sure that the more loans banks give out, the less capacity they have to give new ones. This results in banks reverting to selling or sharing their risk with other financial actors, as a means to free up space in their own balance sheet. 

Under early Basel rules, banks essentially treated all corporate borrowers the same, and little differentiation was made between ‘strong’ and ‘weak’ borrowers. They paid minimal attention to risk indicators such as credit ratings, stability of cash flows, and debt levels. 

Basel II, released in 2004, had three central pillars: capital adequacy requirements, supervisory review, and market discipline. Unlike earlier rules, there were now more risk-sensitive capital requirements, and instead of the one-size-fits-all approach of Basel I, banks could now use external credit ratings or their own internal ratings-based (IRB) approach to determine how much capital they had to set aside. 

This meant that a loan to a highly-rated multinational corporation no longer carried the same capital charge as a loan to a small, riskier firm. This incentivised banks to actively manage and distribute risk. However, the 2008 financial crisis exposed Basel II’s weaknesses. By allowing banks to rely heavily on their own internal risk models, it left space for inconsistent practices. When markets collapsed, it became clear that capital cushions were not robust enough. These shortcomings directly informed Basel III. Regulators tightened the rules; improving the quality of bank regulatory capital, increasing capital requirements, and introducing international frameworks.

Langlois noted that one of the biggest shifts over the past 25 years has been the evolution of data and the regulatory framework, suggesting that while Basel II allowed banks to build internal models to manage risk, Basel III forced them to adapt further. As he put it, “banks had to build their own model, taking into account their business model,” and use different instruments to be able to maximise their capital efficiency.

This push for capital efficiency led to the rise of structured solutions. Instead of simply sharing risk bilaterally with other banks, institutions began to repackage their trade assets. Securitisation and more sophisticated on-balance sheet (OBS) emerged as key tools.

Securitisation and OBS solutions

Securitisation refers to the pooling of individual trade finance assets into a portfolio. The portfolio then gets sliced into securities and sold to investors, transferring the risk from the bank’s balance sheet and freeing up valuable regulatory capital. As Langlois explained, “What those structures do is they allow for a very large group of assets to be continuously replenished into a portfolio and distributed, given the short-dated nature of trade finance.” 

Langlois also highlighted collateralised loan obligations (CLOs), a type of synthetic securitisation that bundles trade finance assets into tranches with different levels of risk and return, making them investable for a range of institutions. For global institutions, CLOs have become an important tool, expanding the scope of distribution while providing capital relief.

Yet securitisation is not a universal solution. It requires large asset pools that are only feasible for global banks with significant Trade Finance origination capabilities and adheres to complex regulatory compliance, which means regulators must recognise their structures. Its reputation also carries baggage.

According to a 2015 report by the European Parliament, securitisation amplified the impacts of the 2008 financial crisis. Banks making the loans had an incentive to issue bigger and riskier ones, because they knew they could quickly sell them on. The firms packaging these loans into securitised products often did so with very few safeguards, and by the time investors bought them, the real level of risk was hidden. 

These shortcomings explain why securitisation remains a specialised tool in trade finance, rather than a mass-market solution. As Langlois discussed, banks rely heavily on more traditional methods of risk transfer. OBS solutions like risk participation agreements, guarantees, and credit insurance allow banks to manage risk and free up capital, while continuing to hold the exposure directly on their balance sheet. 

Beyond securitisation and traditional OBS tools, Langlois noted that Standard Chartered has also experimented with “secondary syndication strategies,” where it blends different kinds of risk-takers – such as reinsurers, insurers, development organisations and other banks – into the same deal. This diversification allows it to spread exposures more widely and accommodate bigger, more complex transactions.

Resilience and the energy transition

These innovations were tested under real pressure when the COVID-19 pandemic hit. According to the Asian Development Bank’s 2023 briefing, it was from 2020 to 2022 that the trade finance gap went from $1.7 trillion to $2.5 trillion. Global supply chains became strained and banks tightened credit. As Langlois explained, more and more “parts of the system”—different financial actors—had to step in to help bridge this gap.

He noted the emergence of Private Credit investors and the challenge of matching this new set of investors appetite with the right products and credit structures, but the outcome has ultimately been a more diversified, resilient market. 

This diversification also involves addressing new financial concerns. A crucial one is sustainability, which has become inseparable from trade distribution. Langlois pointed out that the surge in renewable energy investment (particularly in solar, wind, and electric vehicles) has created “very large requirements in terms of guarantees” that no bank can meet on its own. 

One bank can’t realistically take up all the risk that comes with renewable energy projects, making trade distribution essential. Standard Chartered has already leveraged syndication capabilities to support such projects in many markets including China and India, where the pipeline continues to grow. 

This trend aligns with broader industry priorities: according to the International Energy Agency, if net-zero targets are to be met, global clean energy investment must rise to around $4.6 trillion annually by the early 2030s. Trade distribution, therefore, is increasingly central to financing the energy transition and aligning financial markets with pressing climate goals. 

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As banks, insurers, and investors work together to bridge the $2.5 trillion trade finance gap, distribution is no longer just about balance sheet optimisation. It is about building resilience and directing capital toward the world’s most critical challenges.