The International Chamber of Commerce (ICC) and the Asian Development Bank (ADB) have created a database of trade finance transactions that show the low-risk nature of lending and guarantees to support imports and exports.
The ICC-ADB Trade Finance Default Register – the first of its kind – currently contains data from 5.22 million trade transactions conducted around the world by nine leading international banks over the past five years.
Reliable and cost-effective finance and guarantees to companies looking to import or export commodities, consumer goods, and capital equipment are critical to keep trade flowing within and between countries. World trade is, in turn, key to global economic growth. Banks currently provide the finance for around 30% of all world trade.
However, banks argue that rules set by bank regulators impose capital requirements on trade finance which are disproportionately high considering the relative safety of such financing. As a result, they say these rules force them to lock up funds that could otherwise be used to support trade, and discourage them from extending more of this essential finance.
“Banks have long told us that trade finance is less risky than other kinds of lending and now we have created a vehicle to demonstrate this,” said Tan Kah Chye, Chairman of the ICC Banking Commission. “Already, the initial data gathered give us an indication that trade finance might warrant some kind of revised capital treatment. This is important if we want to ensure that trade – the engine of the global economy – keeps growing.”
The database of $2.5 trillion worth of trade deals showed that most trade finance transactions were short term in nature, averaging 115 days. The banks participating in the project reported only 1,140 defaults in the last five years. Even through 2008 and 2009 – the worst economic downturn since the Great Depression – the banks reported only 445 defaults out of just over 2.8 million transactions.
“Making sure that banks can provide finance to support trade is particularly important to developing countries, which have typically found it harder to compete for available funds but which are now key drivers of the global rebound and global economic rebalancing,” said Steven Beck, head of trade finance at the ADB. “As bank regulators and world leaders meet in coming months to discuss the future of the world’s financial and economic structures, it’s essential that trade finance stays front and center in the deliberations.”
The ICC-ADB Trade Finance Default Register is a result of the ongoing work of the ICC Banking Commission, which serves as the global forum and rule-making body for the international trade finance community. The preliminary findings were presented to the 300 delegates attending an ICC Banking Commission meeting on the future of trade and finance last week in Florida, USA.
ICC Chairman Rajat Gupta said: “Any change in regulation requires fact-based analysis. Helping to fulfill ICC’s mission to fill the information gap in trade and finance, the trade register now provides evidence on the nature of trade finance.”
ICC and ADB will present the findings of its new register when they next meet with the Basel Committee on Banking Supervision (BCBS) and the World Trade Organization’s Export Group on Trade Finance. The BCBS, part of the Bank for International Settlements, is responsible for developing the Basel Accords on bank capital.
“ICC and ADB will continue to work to broaden and deepen the data in the register to ensure that it is a comprehensive long-term tool that can be used by regulators and banks alike to assess the status of the trade finance market,” said Philip Erquiaga, Director General of ADB’s Private Sector Operations Department.