ICC Trade Register Report 2017
The report reveals the low-risk nature of transactions that support global trade, and confirms that trade finance products continue to present banks with low levels of credit risk.
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 2017 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.
The 2017 report, produced with support from ICC’s project partners—The Boston Consulting Group and Global Credit Data—draws on information from 22 member banks to present a global view of the credit risk profiles of trade and export finance transactions.
It is based on over US$10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016. The 2016 Trade Finance data set includes approximately 40% of global traditional Trade Finance flows, excluding Loans for Import/Export.
The latest trade finance findings reveal that the expected loss of trade finance products continues to compare favourably against other similar asset classes such as large corporate and small/medium enterprise lending. This is coupled with short times to recovery and relatively similar loss given default rates to comparable asset classes.
Export finance also presents a very low risk for banks, with low expected losses deriving from a combination of low loss given defaults (LGDs) and probability of defaults (PD). In 2016, export finance saw a slight increase in expected losses driven by small growth in annual default rates, consistent across all asset categories except financial institutions.
The results of the 2017 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, enhancing data quality and methodology, and further aligning data quality with regulatory practice. ICC plans to include supply chain finance on a trial-basis for 2018 to reflect its increased global usage. Export finance analysis could also be expanded to transactions covered by non-OECD ECAs.