Further supporting ICC’s advocacy of trade finance as a strong contribution to economic recovery and growth, this evidence has the potential to alter attitudes towards trade finance, and therefore contribute to the growth of both global trade and the global economy.
Based on data contributed by the major global commercial banks and reflecting more than 4.5 million transactions totalling an exposure in excess of US$2.4 trillion, the ICC Trade Register Report 2014 (“the Trade Register”) empirically demonstrates that trade finance is lower risk than many other types of financing and assets. It records that short-term trade finance customer default rates range from a low of 0.033% to a high of 0.241%, which is a fraction of the 1.38% default rate reported by Moody’s for all corporate products (according to 2012 figures).
First launched in 2009 by ICC’s Banking Commission, the report is widely recognized as one of the world’s leading analytical reports on global risks for the trade finance industry—identifying risks across a range of trade finance products and markets.
The report offers those involved in trade—whether in business, finance, government or multilateral institutions—a tool for understanding the risks, which should support liquidity and the regulatory oversight of the technique. Around 80-90% of cross-border trading activity relies on some form of trade finance, making the regulatory treatment of instruments such as letters of credit (L/Cs) and pre-export finance vital for the health of the world’s economy. In fact, it was the market’s concern that the regulatory requirements were subjecting trade finance to disproportionately stringent capital-adequacy standards that encouraged ICC’s Banking Commission, through an initial partnership with the Asian Development Bank, to initiate the Trade Register. Those same concerns underpin ICC’s on-going engagement in this initiative, to empirically support what had previously been only anecdotally known: that trade finance is a low risk asset class for lenders.
The findings of ICC’s Trade Register therefore have the potential to transform trade, and—by association—open up trade finance as a lubricant for economic growth. By demonstrating trade finance is low risk—not just anecdotally, or theoretically, but through data gathered from the major global commercial banks—the Trade Register not only acts as a vital tool for both policymakers and financial regulators, it encourages lenders to finance trade activity in the developed and emerging economies, and for both the short- and medium-term. As such, the report could encourage economic recovery and value-creation, as well as enable SME growth, international development and, therefore, the engagement of emerging markets.
“The intention of the Register was to progress the understanding of trade finance, its importance to global trade and its highly-effective risk mitigation capabilities,” explained Kah Chye Tan, Chair of ICC Banking Commission. “The impact of the Register, however, is much greater. As the latest results show, the Register provides concrete fact-based evidence that trade finance is low risk which, if fully reflected in capital requirements, would help banks to give companies the financing support they need for their exports, and to contribute even further to the global economy as it recovers from the global financial crisis.”
The report demonstrates the low risk nature of both short-term, and medium- to long-term trade finance. Short-term trade finance (with an average contractual tenor between 90-180 days) customer default-rates for 2008-12 were 0.033% for export L/Cs, 0.117% for import L/Cs, 0.157% for performance guarantees, and 0.241% for loans for import/export. Meanwhile, the report explains that for medium-long term export loans included in the Trade Register—where an export credit agency (ECA) has provided either state-backed Guarantee or Insurance to the financing bank—the expectation is that losses will be very low unless the ECA itself defaults, which is typically considered remote as the loans are government-sponsored and the ECAs generally have investment-grade ratings.
“In terms of data, this year’s report is the most robust and relevant to date, and is better aligned with the Basel methodology,” said Alexander Malaket, co-Chair of the ICC Trade Register project and member of ICC Banking Commission Executive Committee. “Given this, the Trade Register will continue to evolve and to advance informed, objective dialogue with regulators and other important stakeholders, who are paying close attention to our findings. ICC’s Trade Register and its annual report are now widely recognized as a comprehensive analysis on global risks for the trade finance industry.”