ICC Register Report October 2011

ICC Register Report 2011

This Report presents the global trade finance industry’s outlook on the risks of defaults in trade finance.

This report builds on the work of the official and private sectors to explore the risks of defaults in trade finance, and continues the analysis carried out by the ICC Banking Commission and its members over the past two years – work that was originally presented in a report in September 2010.

Key messages

  • Trade Finance, which supports USD14-16 trillion in annual global commerce, is crucial for international trade. It facilitates and enables the management of cross-border trade for bank and corporate clients. These transactions are underpinned by the movement of goods and services and evidenced by commercial contracts that document the relationship between buyer and seller.
  • The ICC Trade Finance Register bridged the information gap impeding the formulation of policies. The absence of data capturing all kinds of trade finance (bank-intermediated and inter-firm) had proven to be a major constraint for measuring the extent of the trade finance shortfall and its effect on trade flows. The ICC’s Trade Finance Register is a significant step forward because it has created a living database of the trade finance market and has helped to demonstrate the resilience of the trade finance business.
  • The ICC Trade Finance Register, the most comprehensive dataset now available on the market, has demonstrated the true nature of trade finance. Historically, trade finance had been considered to be an extremely low-risk, routine operation. This perception—which is reflected in much of the specialist literature on the subject—developed partly as a result of the anecdotal experience of practitioners over the past half century. Today, ICC Register data reveal that a minimum of 60-65 percent of traditional global trade finance activity is based on assets (or about USD2.2-2.5 trillion).
  • Data pooled within the Register supports the view that trade finance is a low risk asset class.
  • ICC concluded that trade finance was not the main driver behind the 2008 trade collapse. First, the shortfall in trade finance could not be considered as a factor in the sharp 2008-2009 drop in trade flows. Trade finance and trade volumes dropped primarily as a result of the spill-over of the financial crisis to the real economy, resulting in lower activity and destocking. Moreover, the crisis was caused by factors exterior to the trade finance industry.
  • Based on the key findings of Global Risks – Trade Finance 2011, ICC maintains that new Basel regulations should not constrain trade finance supply, especially for banks based in low-income countries (as well as second- and third-tier banks in middle-income countries). ICC has called on standards setters and policy makers to carefully study the potential unforeseen impact of Basel III changes on trade finance.
  • In particular, the report’s 2011 data supports the view that the increase in the leverage ratio under the new regime would not reflect market realities and may significantly curtail banks’ ability to provide affordable financing to businesses in developing countries and to SMEs in developed countries. In addition, the dataset confirmed that the one-year maturity floor applied to trade assets under the advanced model should be reconsidered, and that the actual maturity of trade transactions should be the most logical standard to be applied.