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The 11th edition of the International Chamber of Commerce (ICC) Banking Commission’s trade register report has confirmed, once again, the low-risk nature of trade finance versus other asset classes.

The 2019 version of the report, released today, contains data up until the end of 2018 for over US$16tn of exposures from 32 million transactions across six products and 25 banks worldwide. The results, which capture approximately 28% of global traditional trade finance flows and 11% of all global trade flows, show that default rates have remained largely the same as, or lower than, 2017.

“With 10 years of data, the message is that this is a low default asset class which finances the real economy,” Krishnan Ramadurai, chair of the trade register project, tells GTR.

Default rates for trade finance products from 2008-2018 average 0.36% for import letters of credit (LCs), 0.04% for export LCs, 0.73% for loans for import/export, and 0.45% for performance guarantees.

Last year’s report, which contained data up until the end of 2017, included supply chain finance (SCF), specifically payables finance, for the first time, to reflect the shift in trade financing from documentary trade towards open account terms. Now in its second year of coverage, the report says that initial indications are that the probability of default for SCF is comparable to other short-term trade finance products. However, the data for 2018 does show an increase in SCF defaults over 2017, from 0.11% to 0.23% when weighted by obligor, due to the collapse of UK-based construction firm Carillion, which impacted suppliers around the world.

With predictions for a drop in world trade of anything between 13% and 32% as a result of the Covid-19 pandemic, the report warns that a “notable increase in defaults” is on the horizon, particularly among SMEs. However, Ramadurai believes that trade finance will hold firm as a low risk asset, even throughout this crisis.

“While default rates will go up across the board, because trade finance is the financing of real economic activity characterised by shorter maturities and shorter times to recovery than other asset classes, from a relative perspective its default rates will be comparatively lower,” he tells GTR. “When the recovery takes place, trade is in a better position. Take letters of credit as an example. They are a safer payment method so people will want them. You will also want bank guarantees to support projects. All of these are products which will help to mitigate risk in some form or the other.”

To get a clear view on this, the trade register team intends to expedite its full-year 2020 data collection to present findings around how the virus outbreak and related lockdown measures have impacted the risk profile of trade finance products in 2021 – as opposed to the usual 16-month lag.

Meanwhile, those involved in the ICC trade register project hope policymakers will use it as a reference point when considering how to support trade and trade financing during, and after, the Covid-19 crisis.

“Governments can possibly do more, particularly with a view to helping the micro and small and medium enterprises, such as bringing forward the capital treatment which is already proposed as part of Basel III to reduce risk weights for MSMEs from 100% to a range between 85% and 75%. Another measure is directing additional funding, specifically targeted to trade transactions that support the real economic activities of manufacturing and supply of goods and services,” says Ramadurai.

Looking ahead, the ICC trade register team says it will review the value proposition of the report to extend its scope and usability and focus on expanding the number of banks providing data, in order to fully capture the risk profile of trade finance as an asset class.