Too soon to withdraw support, trade finance experts conclude
Despite improvements over the last year, trade finance markets remain fragile and it would be premature to wind down official support, at least for the immediate future according to the Expert Group on Trade Finance who met in Geneva last week under the chairmanship of World Trade Organization Director-General Pascal Lamy.
The group – composed of members of the ICC Commission on Banking Technique and Practice and other representatives from commercial banks, and regional and international institutions – convened at WTO headquarters on 18 May to analyze current trade finance market conditions and to discuss possible ways of ensuring that regulation does not hamper recovery.
Discussions revealed that following the global economic crisis, recovery patterns across regions have been mixed, with emerging markets displaying the greatest signs of improvements.
At the meeting, ICC presented the findings of its recently released 2010 global trade finance survey: Rethinking Trade Finance, which said that relative demand for traditional trade finance products has increased over the past year – largely as a result of the added security offered by products such as letters of credit, compared with trading on an “open account” basis.
ICC noted that Asia, in particular, continues to register far greater volumes for both sent (import) and received (export) trade messages between banks relating to the handling of documentary credits, guarantees and documentary collections, while in Africa – particularly Sub-Saharan African – there remain strong constraints to trade finance. Participating representatives from commercial banks said that this was mainly due to the high cost of obtaining information on counterparty risk and low profitability in the region, which made financing trade unattractive to them.
Expert Group representatives from the banking sector meanwhile asserted a rapid fall in trade finance prices in recent months. Yet, with respect to regulatory issues, the industry raised some of its common concerns in relation to the non-recognition of trade finance safety under the international capital adequacy regime known as the Basel II framework. They reiterated that the proposal to increase the risk weighing of trade financing under a new framework to limit bank leverage could further adversely impact the supply of cost-effective trade credit to businesses.
While at a 2009 meeting the Expert Group noted that the shortage of liquidity to finance trade credit was the main problem, in 2010 global suppliers of trade credit indicated that they had actually recovered a sufficient level of liquidity, and that the problem remained essentially one of risk. The ICC trade finance report clearly pointed out that banks had started to be more risk assertive and more selective with clients, said ICC representatives at the gathering. Credit risk support is therefore still very necessary, and the G20 stimulus package had been, to a large extent, successful in mitigating such risk.
At the meeting an industry representative reported that to back the conviction that trade finance is safer than other forms of lending, a phase of inter-institutional constructive dialogue had been initiated. A representative from the Basel Committee also indicated that he was ready to engage in a discussion with industry representatives but stressed that any such discussion should be fact driven. Working with the Asian Development Bank (ADB) and in collaboration with several major commercial banks, ICC has established the ICC-ADB Trade Finance Default Register group to pool data on default rates.
Steven Beck from ADB concluded: “The core idea of the register is to demonstrate empirically, what we already believe: that trade finance carries low risk compared with other forms of finance.” Meetings have already been scheduled by ADB and ICC to analyze the data with the Basel Committee.