ICC Trade Register Report 2016
The 2016 report corroborates findings from previous years that Trade Finance products present banks with short average maturities, and little credit risk, with low default rates and loss rates.
International trade is central to the world economy and economic development, and a critical engine of growth across industries and markets. Indeed, pre-crisis trade had been increasing at twice the rate of GDP growth1 as existing corridors grew and new ones opened with the industrialisation of developing economies.
Trade Finance underpins much of this trade, and provides importers and exporters with the financing and risk mitigation that allows them to transact with distant and often unfamiliar counterparties.
In order to manage Trade Finance as a product effectively, banks do not only need to understand the full risk profile (e.g. country, currency, counterparty, delivery, and credit risk) of their business, but also the regulatory and strategic implications. The ICC Trade Register aims to support banks achieve this by providing an objective, transparent view of the credit-related risks and characteristics of Trade Finance using a rich, data-driven approach. Detailed analysis and commentary also help build understanding of the global issues around Trade Finance and contribute to relevant informed policy and regulatory decisions. Several methodological enhancements have been made to the report this year to improve scope and accuracy, as part of the Trade Register’s evolution.
The 2016 report corroborates findings from previous years that Trade Finance products present banks with short average maturities, and little credit risk, with low default rates and loss rates. While this low credit risk profile is set to remain, Trade Finance is facing a number of changes to which banks must respond:
- Global trade is slowing, heavily affected by commodities and developing economies
- Banks are showing a reduced risk appetite, limiting supply and refocusing on their core
- Corporates are shifting towards Open Account, fuelled – in part – by Digital
- Regulatory compliance, while critical and well-intentioned, is a growing challenge to banks
- Margins are falling, driving the need for operational efficiencies
As banks respond to these, it is crucial they understand the credit, operational and reputational risk implications of any strategic response to these challenges, on top of the commercial impacts.
For Short-Term Trade Finance specifically, the 2016 Trade Register reveals a slight uptick in defaults observed from 2013-2015 across products and geographic regions, resulting from a combination of one-off events and potentially more systematic factors. Nevertheless, these products continue to have a favourable risk profile versus comparable asset classes, such as corporate and small and medium-sized enterprise (SME) lending.
Similarly, for Medium to Long-Term Trade Finance, the 2016 Trade Register shows an increase in defaults across all regions except ex- Commonwealth of Independent States (ex-CIS) countries and the Middle East. Nevertheless, the vast majority of this effect is driven by two countries, Singapore and Spain, as a result of non-systemic, obligor-specific events. A marginal rise in Loss Given Default, and therefore Expected Loss was also evident in 2015. Despite these trends, however, the level of risk for Medium to Long-Term Trade Finance remains low, especially given Export Credit Agency backing.
The results of the 2016 Trade Register provide the basis for strong advocacy for favourable treatment of Trade Finance as an asset class by the Basel Accords. This would further increase the attractiveness of Trade Finance to banks, and in turn, provide benefit for global trade and market access. In parallel, there is also the case for Trade Finance to be increasingly recognised as an investible asset class from institutional investors, which may provide further funding and support for the industry.
Going forward, there are a number of avenues the ICC is exploring alongside its partners in order to drive additional value from the Trade Register, particularly for the Member Banks who have provided generous, continued support to the Project over past years. These include, but are not limited to, broadening the scope of products and risk categories assessed as part of the exercise, as well as developing a data-sharing provision so that Member Banks can utilise the Trade Register data for their own internal modelling.