Defence finance is getting serious - Trade Treasury Payments

• Home
• Blog
• Articles
• Defence finance is getting serious

Defence finance is getting serious

Geopolitical upheavals and a surge in military spending have pushed defence finance from the taboo backwaters to priority status for many banks, investors, and policymakers. 

On Tuesday, the International Trade and Forfaiting Association (ITFA) hosted a webinar titled “No longer a taboo: financing solutions for defence, security and resilience,” exploring how global tensions have forced a re-think of financial norms when it comes to defence financing. 

The webinar participants included:

• Sean Edwards – ITFA Chairman
• Robbie Boyd – CEO, Encompass
• Rob Murray – Founder, RowCo Strategy Studios; CEO, Defence, Security and Resilience Bank Development Group
• Kevin Reed – Entrepreneur, Chairman & CEO; Former Hon Colonel, Canadian Army; Former Hon Consular General for Singapore

Heavily discussed during the event was the concept of a  dedicated Defence, Security, and Resilience Bank (DSRB) modelled on development banks and aimed at funding defence capabilities without undermining fiscal and ethical standards. 

Piggybacking off the ITFA webinar, this article explores why defence finance has become newly prominent, what the DSRB could offer, how trade finance can strengthen defence supply chains, and how institutions are navigating compliance and ESG considerations in this sensitive arena.

Why defence finance is in the spotlight

Global military expenditure is on the rise. World defence spending hit a record $2.72 trillion in 2024, a 9.4% jump on the previous year, the steepest rise since the Cold War, as over 100 countries increased their defence budgets amid heightened tensions. Europe in particular saw a 17% surge, pushing European military outlays above late-1980s levels. 

The immediate catalyst has been Russia’s invasion of Ukraine, which shattered assumptions of lasting peace in Europe, forcing the bloc’s members, long accustomed to low defence spending, to pivot. Germany, for example, created a special €100 billion fund to modernise its armed forces, and France plans to expand its military budget by one-third by 2030. 

Amplifying the urgency for Europe has been the uncertainty surrounding the US commitment to the continent’s security, with the Washington calling on its European counterparts to shoulder more of the NATO defence burden. This convergence of crises means defence and security are now strategic financial priorities. Governments urgently need ways to fund military build-ups and resilient supply chains without derailing public finances. 

Yet traditional funding methods are straining. Estimates suggest Europe alone faces a €500-800 billion shortfall in defence investment, even as high public debt levels constrain new borrowing. In short, finding innovative financing solutions for defence has become essential both for equipping militaries to bolster deterrence and to maintain what EU leaders call “strategic autonomy” in a fracturing geopolitical order. 

This explains why ideas once considered outlandish (such as a multilateral defence development bank) are gaining traction at the highest levels.

A multilateral bank for defence and resilience

One of the most talked-about proposals is the creation of a Defence, Security and Resilience Bank (DSRB) – essentially a multilateral development bank for the military domain. The concept, which has won backing from the European Parliament’s recent white paper on European defence, envisions an institution that would pool capital from multiple governments (EU members and even non-EU allies) to finance defence and security projects. 

In many ways, the DSRB would mirror the model of existing development banks in that member states would contribute equity capital, allowing the bank to borrow cheaply on capital markets thanks to a likely AAA credit rating. As an off-balance-sheet lender, the DSRB’s loans would count as contingent liabilities (rather than direct national debt), meaning countries could strengthen their militaries without breaching debt limits or straining fiscal ratios. 

That is important. Borrowing from a multilateral defence bank would not add to a government’s official debt stock, yet would unlock substantial new funding for critical equipment, infrastructure, and R&D. Proposed benefits of a DSRB have been likened to those provided by institutions like the World Bank or European Investment Bank, but tailored to defence needs. It could offer low-interest, long-term loans for priorities such as military modernisation and cyber defence. With its high credit rating and government guarantees, the DSRB could raise funds at rates far below what many individual nations would pay, then on-lend on very favourable terms for defence projects. 

Crucially, a DSRB could also provide guarantees and insurance on defence-related loans, absorbing risks that commercial banks are wary of. In practice, this means private lenders would be more willing to finance defence contracts since the multilateral bank would stand behind the deal to reassure creditors. Some proponents note it would effectively securitise Europe’s security needs, injecting global finance into defence in a way that hasn’t been done before. 

Beyond simply lending to governments, the DSRB’s mandate would likely extend to strengthening the resilience of defence supply chains, especially at the deep-tier level. For example, the bank could work with export credit agencies and private banks to funnel capital into smaller defence suppliers, helping them ramp up production of everything from semiconductors to munitions. 

In essence, the DSRB could become a dedicated one-stop shop for defence financing, something experts say is urgently needed, given an estimated hundreds of billions in new investment demand. Its creation would mark a significant change in the financial architecture of NATO and EU allies, embedding defence spending into the fabric of international finance rather than leaving it solely to strained national budgets. 

Mobilising trade finance in defence supply chains

While cutting-edge jets and tanks may often be first to mind when thinking about defence spending, it also involves the hundreds of smaller companies producing components, materials and services that feed into those end products. Ensuring these supply chains can deliver at speed has become a critical focus, especially as countries scramble to replenish stockpiles and build new capabilities. 

Defence supply chains are famously complex and multi-tiered. A prime contractor (say, an aerospace or shipbuilding giant) might depend on hundreds of SME suppliers for subcomponents. If a Tier-2 or Tier-3 supplier lacks the working capital to quickly buy raw materials or expand capacity, it becomes a bottleneck, even if governments are pouring money into the top of the chain. 

Unfortunately, many smaller defence firms are cash-constrained and face lengthy payment terms on government contracts (often only paid upon delivery or milestone). Banks have historically been reluctant to finance defence SMEs, citing heavy compliance requirements and reputational concerns, especially for contracts that may be classified or unpredictable. This creates a dangerous weak link, since without liquidity, those small suppliers cannot scale up production, limiting the entire chain’s agility. 

This is where trade finance can make a decisive difference. Techniques like deep-tier supply chain finance allow a small subcontractor to receive immediate payment on an invoice, funded by a bank against the credit of a highly rated buyer (like a government or major defence firm). In practice, a machine shop building missile components could borrow against the payment approval of the Ministry of Defence, getting cash upfront at favourable rates tied to the bigger entity’s creditworthiness. This “buyer-led” financing pushes much-needed liquidity down the chain to where it’s needed most. 

The ITFA webinar panel stressed that ensuring liquidity at every level is critical for resilience. Shorter delivery lead times can be achieved because suppliers with ready financing can procure inputs and staff up quickly instead of waiting months for payments. Such programmes essentially convert the government’s strong credit into working capital for small contractors. 

The proposed DSRB could be a force multiplier in this area. By providing guarantees or insurance to banks on defence supplier loans, the DSRB would help allay banks’ worries about extending credit to the sector. For example, with a DSRB guarantee, a commercial lender might finance an SME’s purchase of specialised tooling for an urgent submarine contract, confident that if the contract is delayed or cancelled due to geopolitics, the loan is protected. 

The DSRB could partner with national export credit agencies as well, blending its guarantees with existing programmes to inject capital rapidly into defence supply lines. In other words, defence receivables and supply chain finance deals could become a new area of business for banks, akin to how infrastructure finance grew in past decades. 

Navigating compliance and ESG considerations

Even as defence finance loses its taboo status, it remains a uniquely sensitive sector from a compliance and ESG (Environmental, Social, Governance) perspective. Banks and investors must tread carefully to ensure that supporting the defence industry does not violate regulations or stakeholder principles. 

For years, many European banks and funds shunned defence outright, a stance that, while well-intentioned, contributed to underinvestment in the sector. Many defence firms have historically often been excluded from ESG-labelled portfolios on the grounds of contributing to violence, despite their role in national security. 

Now, however, there is a gradual shift in perspective. The UK’s Financial Conduct Authority, for instance, has affirmed that nothing in its climate or sustainability regulations prevents investment in or lending to defence companies. EU authorities have similarly noted that their sustainable finance framework does not explicitly prohibit defence, though activities like controversial weapons remain restricted. 

In practice, this puts the onus on investors’ own mandates since funds can choose to include defence if they believe it aligns with a broader social good of protecting societies. Some have even floated the idea of rebranding ESG to “ESSG” – adding “Security” as a factor alongside environment and social issues. 

On the compliance front, financing defence contracts demands rigorous due diligence. Arms trade is subject to strict export controls, sanctions and anti-corruption laws. Banks must verify that transactions comply with international treaties and that equipment isn’t diverted to rogue actors. Transparency is a challenge, since defence deals often involve classified information and government intermediaries. This can make it harder for banks to conduct know-your-customer and monitor end-use. 

Banks need to explain to the public and shareholders how financing a satellite system or naval vessels fits within a responsible finance framework. Today’s threats do not mean abandoning ESG values. Instead, they should prompt a broadening of the view of sustainability to include security and ensure robust safeguards around any defence deals.

No longer a taboo

The frank discussion in ITFA’s “No longer a taboo” webinar shows that the financial community is more ready to engage with defence and security in ways it largely hasn’t for decades. Geopolitical realities have changed, and the financing and institutions that we use need to change in step to reflect the new reality.

International finance professionals are exploring how tools like the DSR Bank, deep-tier trade finance, and new compliance frameworks can help meet security needs while still upholding fiscal discipline and ethical standards. Nobody wants a return to freewheeling arms financing, but without adequate funding, even the best defence strategies will falter. 

The next few months will be decisive. The DSRB team is preparing to host an Information Day on the proposed structure, with active involvement expected from UK, EU, and NATO political stakeholders. This marks a key staging post before negotiations begin on the international treaties required to establish a multilateral bank. In parallel, it’s essential that national-level efforts, through export credit agencies and sovereign wealth funds, are mobilised to ensure supply chains and working capital frameworks can evolve in step with the new institutional design. Without this alignment, the risk is that top-level financial architecture develops without the operational liquidity needed for suppliers to scale.

Ensuring our collective security may well require harnessing the same financial ingenuity that has driven progress in other sectors. The taboo is fading, replaced by an understanding that economic stability and security can (and must) be pursued hand in hand. The challenge now is to make good on that insight, developing financing solutions that fortify defence and resilience while staying true to the values that those defences exist to protect.