Liquidity-Saving Mechanisms in Trade Credit Networks: Optimising Corporate Liquidity
FNA Papers Series
By Anthony Butler, (Saudi Central Bank (SAMA)), José Fernando Moreno Gutiérrez, Dr Carlos León, (FNA & Tilburg University) & Dr Kimmo Soramäki, (FNA)
Trade credit—the delayed payment for intermediate goods and services—serves as a vital source of short-term financing for non-financial firms, often acting as a critical lifeline during economic downturns. However, the deeply interconnected nature of corporate supply chains means that trade credit also acts as a channel for systemic contagion. When economic headwinds cause firms to delay payments, a cascading network effect ensues, spreading liquidity shortages and solvency risks throughout the economy. Just as interbank markets face gridlocks when a single bank fails to settle, trade credit networks are vulnerable to dangerous cyclical and chain-based payment blockages.
To mitigate these risks, this paper proposes the creation of a new Financial Market Infrastructure (FMI) designed to apply Liquidity-Saving Mechanisms (LSMs) directly to corporate trade credit networks. Drawing inspiration from both 12th-century medieval clearing fairs and modern large-value interbank payment systems, this proposed FMI would utilize advanced algorithms to identify reciprocal obligations, clearing chains, and cyclical payment flows. By applying techniques such as multilateral netting and intelligent payment resequencing, the system can clear vast amounts of corporate debt without requiring external liquidity. A case study utilizing trade credit data from the Huangdao Zone in China demonstrated that applying these LSMs could achieve a 32% reduction in the liquidity required to settle all obligations.
Ultimately, deploying LSMs in trade credit networks offers profound macroeconomic and microeconomic benefits. It prevents cascading corporate defaults, frees up working capital for growth, and strengthens supply chain resilience. Furthermore, centralizing this data within an FMI would provide central banks, governments, and commercial lenders with unprecedented, real-time visibility into the notoriously opaque supply chain, enabling proactive risk monitoring and vastly improved credit scoring.
