Trade volume and value decline sharply as a result of crisis
Trade has significantly decreased in both volume and value as a result of the worldwide recession and may be reduced further due to tight credit conditions, ICC said in a report presented at a meeting of banking experts organized by The World Trade Organization (WTO).
“The overall decrease in volume and value is confirmed,” Vincent O’Brien of the ICC Commission on Banking Technique and Practice, told the gathering. “Tight credit conditions may further reduce access to trade finance.”
Mr O’Brien added that 47% of the 122 banks surveyed reported a decrease in export Letter of Credit (LC) volume and that 43% reported a decrease in LC value of aggregate transactions.
The meeting was called to review current market conditions, discuss the initiatives undertaken by financial institutions as well as regional and international organizations. Under the chairmanship of Pascal Lamy, Director-General of the WTO, delegates presented their most recent findings and analysis, concluding that the prospects for 2009 are negative.
This is particularly true for emerging markets, with large scale-financing projects being deferred or difficult to finance. Low-income countries are affected through lower commodity prices and fewer remittances, according to ICC.
More than half of the respondents (51%) in the ICC survey indicated that their trade credit lines for financial institutions decreased between the last quarter of 2007 and the last quarter of 2008. The main reasons provided by banks for the decrease in credit lines were the application of more stringent credit criteria, capital allocation restrictions, exiting markets, and reduced inter-bank lending.
ICC also pointed out that intense scrutiny of documents by some banks are leading to higher rates of rejection of letters of credit on the basis of minor discrepancies.
The consensus at the meeting was that trade flows have been deteriorating rapidly in recent months. There is now evidence of a major economic crisis spreading and deepening across the global economy, the session concluded.
The meeting was attended by the International Monetary Fund (IMF), the World Bank, and the major development banks. The Banker’s Association on Finance and Trade and the Berne Union (a coalition of the world’s main export credit agencies and insurers) were also present. International banks such HSBC, ING, JP Morgan Chase, Citigroup, Commercerzbank, BNDES, Royal Bank of Scotland, and Standard Chartered Bank also sent delegates. For the second time, the ICC banking commission was invited to attend the meeting.
In its presentation of the major findings from the banking commission study carried out between 10-12 March, ICC also noted that evidence is now accumulating that implementation of the international capital adequacy regime, known as Basel II, has contributed to the drought of available finance.
The feedback collected by ICC shows that most banks are now facing tougher capital requirements for their trade assets. At the WTO meeting, ICC emphasized that the implementation of the Basel II framework has eroded the incentive of banks to lend for trade finance due to pronounced capital weightings which are not fully reflective of the low risk level of the activity.
In this connection, banks reported difficulties identifying and isolating sufficient data to produce valid estimates of risk attributes for trade lending under the Basel II framework. As a result, the amount of capital banks must hold against trade finance is often artificially inflated. ICC was asked at the session to consider how it might collect historical and performance data for trade finance products to assist in addressing this situation.