Trade finance is lower risk than other types of financing and assets, according to the Trade Register Report 2014 released by The International Chamber of Commerce (ICC).
The report was announced yesterday at GTR’s North America Trade and Export Finance Conference in New York, by chair of the ICC’s banking commission Tan Kah Chye.
Data from the major global commercial banks, reflecting more than 4.5 million transactions with a total exposure of more than US$2.4tn, records that short-term trade finance customer default rates range from a low of 0.033% to a high of 0.241%. This is considerably lower than the default rate for all corporate products, reported as 1.38% by Moody’s.
From 2008 to 2012, short-term trade finance (with an average contractual tenor between 90-180 days) customer default rates were 0.033% for export LCs, 0.117% for import LCs, 0.157% for performance guarantees and 0.241% for import/export loans.
The report also indicates the low risk nature of medium to long-term trade finance. Losses from ECA-backed medium to long-term export loans are expected to be very low unless the ECA itself defaults: an unlikely outcome considering these loans receive government sponsorship from ECAs that are often investment-grade rated.
But the report does not include empirical data to support this. An ICC spokesperson tells GTR: “Investment grade ratings means that they are low risk. As the export loans are backed by the government and ECA, they are generally safe.”
“In terms of data, this year’s report is the most robust and relevant to date, and is better aligned with the Basel methodology,” explains co-chair of the ICC Trade Register project and member of the ICC banking commission executive committee, Alexander Malaket.
Launched first in 2009 by ICC’s banking commission, the report identifies risks across a range of trade finance products and markets and is recognised as a leading analysis on global risks for the trade finance industry.
“The intention of the Register is to progress the understanding of trade finance, its importance to global trade and its highly effective risk mitigation capabilities,” says chair of the ICC banking commission, Tan Kah Chye.
“The latest results show that it provides concrete fact-based evidence that trade finance is low risk which, if fully reflected in capital requirements, would help banks give companies the financing support they need for their exports, and to contribute even further to the global economy as it recovers from the financial crisis.”
Acknowledging a concern that regulatory requirements were subjecting trade finance to disproportionately stringent capital adequacy standards, the Trade Register was started through an initial partnership between the ICC and the Asian Development Bank. The ICC hopes the Register will help to open up trade finance as a lubricant for global economic growth.