Traders are increasing finding it tougher to trade commodities and goods because of the increasing reluctance by banks to issue Letters of Credit
;-) -- $E(X_t|F_s) = X_s,\quad t > s$
A bank LC, effectively a form of short term credit (secured by the goods and the insurance covering the shipping) is the traditional way to cover that. It's a specialised part of banking, but very straightforward and well understood, with very little risk.
With the banking crisis, it would seem that banks have become reluctant to provide such LCs , which is really worrisome because the whole point of LC is that they do not actually need to be funded: it's a promise by a bank to pay money, not an actual disbursement, so banks should not be too limited in providing those. (unless the problem is that the counterparties no longer accept banks as the guarantor of funds)
This is not good news at all. In the long run, we're all dead. John Maynard Keynes
(unless the problem is that the counterparties no longer accept banks as the guarantor of funds)
The reports I've read rather implied that this is the problem.
I'm in two minds whether to classify this as the psychology of fear or not. After all, banks are failing... but so far they are being nationalised and presumably LoCs are being fulfilled...
Actual letter of credit banking is a multi-step process that provides possible failure points of changing conditions over time. Although the cash is not disbursed until arrival, the bank´s promise to pay is a recorded liability.
