Efforts to create a database on the level of defaults in trade finance are growing, following a meeting held in Brussels.
Hosted by the ICC Banking Commission at the end of November, a variety of development banks, multilaterals, banking associations and commercial banks met to discuss how to record the performance of trade finance assets.
It has long been argued that a registry of trade finance defaults is needed to help unlock much-needed liquidity into the market.
The availability of trade finance has been reduced over the past year by the effects of the global financial crisis. However, many argue that the implications of the Basel II legislation have further hampered the market.
“Capital allocations for trade finance transactions under Basel II are considerably higher than under Basel 1,” explains Steven Beck, head of trade finance at the Asian Development Bank (ABD), and a major supporter of the register initiative.
“This continues to be a major problem in the trade finance community as it sucks out what capital is available to support trade and creates more of a capacity issue than otherwise would exist.”
“The creation of this register sets out to demonstrate what we intuitively know – that trade finance carries a relatively low probability of loss compared to other forms of finance.”
Beck remarks that informal guesses suggest trade finance losses can be as low as 77 cents per US$1mn of trade transactions. Trade finance has been historically seen as a safer asset class. In countries going through debt restructurings, it is often the first type of debt to be repaid in full. Yet, to date, there are no hard data to support this argument.
Following the Brussels discussions, a deadline of the end of March was set for the submission of the historical trade finance statistics. The 10 participating commercial banks will have to compile data that tracks the performance of trade finance over the last five years.
Once submitted and then collated by the ICC, a report will be presented to the Basel committee.
“We’ve had some informal discussions with Basel committee and trust they will be open to the statistics we present,” comments Beck.
The efforts of Beck and the ICC are expected to be welcome by the market. “The magnitude of the task and the willingness of banks to participate speaks to the importance of coming up with these statistics,” Beck observes.
The lack of statistical data on trade finance has long been a challenge for banks and policy makers.
“Hopefully this register will go some way to addressing that information gap and unlocking a great deal of capital that can be used to support trade finance in the most challenging markets,” Beck comments.
“Everyone is keen to just get on with it,” he adds.
Once compiled, the data will not only be of use to policy makers and regulators, but also for the financial institutions themselves, helping them support their internal applications for credit limits. It would allow trade finance departments to demonstrate to their risk management departments what, if any, historical losses in trade finance have taken place in certain countries.
Beck elaborates: “When I was applying for limits on number of different Pakistani banks – I heard anecdotally that there has not been a default on a short-term LC coming out of Pakistan – I have no hard evidence to say that is the case, it’s tough to argue for higher limits.”
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