Based on data from ICC’s Trade Register, a comprehensive online database of over 15 million transactions provided by 21 banks, the new report shows that trade finance is a relatively low-risk asset class that should not be feared by financial institutions, nor overregulate by governments.
In relation to comparable corporate default rates, the trade register data recorded a lower level of defaulted transactions adding weight to the hypothesis that trade finance transactions enjoy a lower than average likelihood of default. For medium- and long-term Export Credit Agency (ECA)-backed transactions, a similarly relative low risk is observed.
The ICC Trade Register contains data reflecting no less than 60-65% of traditional global trade finance activity, worth approximately US$2-2.5 trillion. Data reveals fewer than 1,800 defaults were made across close to 8.1 million short-term trade finance transactions. This equates to an approximate 0.02% default rate on a transaction basis. Consolidating the volume of trade and export finance and the likelihood of default for trade and export finance products, the ICC Trade Register is vital to crafting fair regulations necessary for a well-functioning global trading and banking system.
“The ICC Trade Register has been instrumental in fostering dialogue with regulators on a global scale. The integrity of the data is proven and is a strong incentive for other banks to participate,” said Director-General of the World Trade Organization Pascal Lamy.
Kah Chye Tan, Chair of the ICC Banking Commission and Global Head of Trade and Working Capital at Barclays said: “I hope that by focusing on the critical connections between default levels in trade finance and the shaping of new regulatory recommendations, decision-makers will be able to engage collectively in efforts to improve the global financial system’s overall resilience.”
Financial regulation requires a solid understanding of the critical issues by all sides – government, regulatory, industry, and multilateral institutions. Global Risks – Trade Finance 2013 is an indispensable tool for both policymakers and financial executives. Because the scale and speed of regulatory change is unprecedented, the information and analysis provided is essential to closely monitor and manage risk in the sector. The report will enable institutions to better understand the level of risks involved for different trade finance products and allow banks to benchmark their activities in a more rigorous fashion.
“For the first time, medium and long-term export finance data was collected and analysed for the 2013 register, improving overall data availability and composition. We are also now seeking a full methodological and terminological alignment with regulator’s perspectives on risk and terminology,” said Thierry Senechal, Executive Secretary, ICC Banking Commission. “With data volume and quality increasing year-on-year as a result of the increasing number of participating banks, the ICC Banking Commission will continue to work with participating banks to support the register and ensure its continued improvement.”
Demand for further data that can provide a complete portrait of the trade and export finance sector is expected to increase over the next 15 years as global trade is poised to grow substantially. Given that a rebound in world trade is essential to propel the continued recovery of the global economy, this need is made all the more urgent.
“Empirical data is essential and ICC’s Trade Register is a big step in the right direction,” said Daniel Cotti, Global Trade Executive at J.P Morgan and Vice-Chair of the ICC Banking Commission Advisory Board.
Global Risks – Trade Finance 2013 was released today at a major gathering of banking industry representatives taking place in Lisbon from April 15-19, hosted by the ICC Banking Commission – the world’s essential rule-making body for the banking industry.
With 80 years of experience and more than 600 members in over 100 countries, the commission has gained a reputation as the most authoritative voice in the field of trade finance.
Download a copy of Global Risks – Trade Finance 2013