For well over a decade, the annual publication of the International Chamber of Commerce (ICC) Trade Register has continued to confirm the low-risk profile of trade finance as compared to other asset classes. However, despite early victories, the data collection project’s ability to persuade regulators that trade finance should be viewed more favourably appears to be waning – raising questions about whether its continued existence is justified.
First launched in 2009 by the ICC Banking Commission in an initial partnership with the Asian Development Bank (ADB), the Trade Register was developed as a response to regulatory requirements that were subjecting trade finance to disproportionately stringent capital-adequacy standards in the wake of the global financial crisis. It tots up default rates in trade and export finance across a range of products and markets, empirically demonstrating the low-risk nature of short-term, and medium to long-term trade finance.
“Although you might know that intuitively this is a relatively low-risk business, we had absolutely no statistics to empirically demonstrate this was the case,” says Steven Beck, head of trade and supply chain finance at the ADB and one of the initiators of what was then called the ICC-ADB Register on Trade and Finance. “So, we got as many banks together as we possibly could and asked them to submit data going back five years on how many trade finance transactions they do and of those, how many went into default,” says Beck.
Armed with the evidence from its initial pool of nine banks, the industry players behind the project took their data to the Basel Secretariat and regulators to call for trade and export finance to be treated in a manner that aligned with the risk and default profile of the business.
“The aim was to drive the kind of granularity that would provide regulators with the comfort to enable much better capital treatment for trade finance, and it did, to a large extent,” Beck tells GTR.
These early wins included a waiver of the one-year maturity floor for both issued and confirmed trade finance instruments covered by the Basel Committee on Banking Supervision – which a number of regulators, including those in the EU, US and Hong Kong, subsequently extended to cover all trade finance transactions. They also included the acceptance that counterparty ratings could be better than sovereign, as well as reduced capital requirements. All of these achievements, Beck says, will have translated into “many billons of dollars” of additional support for trade finance, particularly in emerging markets.
But more regulatory threats to the trade finance industry continue to emerge – such as the proposed changes to the EU’s Capital Requirements Regulation (CRR) that would define off-balance sheet instruments such as technical guarantees, performance bonds, warranties and standby letters of credit as “medium risk”, hiking the required credit conversion factor to 50%, from the 20% under the current CRR. Meanwhile, many in the industry fear that without more regulatory advocacy, the implementation of Basel III will place further restrictions on banks active in trade finance lending.
However, of late, regulators seem increasingly reticent to adopt the Trade Register’s findings into their policymaking decisions.
“Every time we discuss the data with national regulators or the Basel Committee, it comes back to the same thing that the data set is too small, too limited, self-selected, and therefore regulators don’t have the confidence in it to go beyond what they’ve already committed to,” says Andrew Wilson, the ICC’s policy director.
“To be fair, Covid-19 pushed a lot of things back,” says Krishnan Ramadurai, global head of capital management for the global trade portfolio at HSBC and chair of the ICC Trade Register project since 2018. “Basel III was supposed to be implemented in 2020 and we now expect this to be rolled out from 2024, with a number of countries moving rapidly to adopt Basel IV in 2025. We’ve had 12-14 years of change, change, change starting with the global financial crisis; there’s fatigue, and regulators just want to get things done.”
A data problem
One of the primary limitations of the ICC Trade Register in the eyes of regulators arises from the fact that it relies on limited data sources. The latest iteration of the report, published last month, captures just a quarter of global traditional trade finance flows and 9% of all global trade flows, from 24 trade finance and export finance banks – meaning that much trade finance activity is still being conducted outside of its purview.
The project’s participants are quick to recognise these shortcomings.
“We can do better in terms of substantiating a healthy, continued debate with the regulators,” says Beck. “We should be able to get better capital treatment than we already have been able to achieve with it. This is going to require more granularity in the data.”
“Over the past several years in particular we have gone to great lengths to acknowledge the limitations of the methodology and the limitations of the data, and we have been very, very open with the broader industry, the regulators and other stakeholders about these limitations,” adds Alexander Malaket, president of Opus Advisory Services International and the Trade Register’s former chair.
To tackle this issue, the ICC is trying to boost the number of banks that contribute to the register, in a number of different ways. The first is by making it easier for them to provide data to the project, explains the ICC’s Wilson.
“Currently, it is essentially an artisanal process, where major banks are using entirely manual processes to extract the data,” he tells GTR. “The feedback is that it takes a lot of time and is very, very difficult, and I think it’s fair to say that this is the primary barrier to significantly growing the number of banks contributing data.”
To smooth and automate the process, in 2018 the ICC Banking Commission joined forces with Global Credit Data (GCD), an association owned by banks and home to the world’s largest database of bank defaults, to strengthen analysis and data collection.
“The reason we went to GCD is because most member banks who contribute to the Trade Register are members of GCD and are already providing them with data. This helped us to cut a lot of the wastefulness and time spent on collecting this data,” says Ramadurai.
But this still hasn’t been enough. “We still have a big problem. Banks need to automate the extraction of data and the submission process to GCD. That’s a piece of work which individual banks need to do,” he says, adding that most trade finance banks are doing this work “on the side of the desk”.
No free rides
Another way that the Trade Register project is seeking to boost participation is by ensuring that only those banks that spend the time and resources on it can benefit from its findings.
“A lot of financial institutions use [the register] with their risk management guys to argue for more capital to be attributed to the trade finance business or for higher limits in certain countries,” says Beck, adding that he has heard from several firms that if it wasn’t for the report, they wouldn’t have made the decision to get into the trade finance business.
The approach by the ICC has been essentially to paywall the report in order to differentiate what a bank can receive as a contributing member – a decision that Wilson says was not taken lightly.
“Ultimately, it’s something we thought we had to do to remove what was a very clear free rider incentive,” he says. “We’ve heard over several years from a number of banks who have basically asked why they should bother providing data when they can access it for free anyway. We want to create the incentive to get more banks to join, because it’s very clear that we need a deeper data set that is much more representative of the overall market, both in terms of number of banks, but also the geographies that are covered.”
Forging a future
Whether the Trade Register project will manage to attract more banks to its mass data collection exercise remains to be seen, but if it is successful in increasing its overall effectiveness, the pay-out for the trade finance industry – and for global trade as a whole – could be enormous.
“Imagine that we could get to a place where there’s sufficient granularity country by country,” says the ADB’s Beck. “Pakistan, for example, is suffering one crisis after another, and yet I don’t know of any defaults or losses in the country. If we can prove that, it would be pretty compelling, in that even when you’re going through a major crisis trade finance remains a low-risk asset. The impact that that could have on developing countries could be really quite substantial.”
A beefed-up register could also help banks face down incoming accounting standards challenges, says Ramadurai. “With the latest report, we are in a good position to estimate all the risk parameters in a robust manner using the ability of GCD, which specialises in crunching data and creating data pools that support the key parameters needed by banks to model credit risk: probability of default, loss given default, and exposure at default. When we started the register, we did not foresee this, but the data can now be used for IFRS-9 accounting and the estimation of expected credit loss provisioning.”
Despite the challenges that it has faced, the Trade Register project has moved with the times. The 2018 version of the report 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. The ICC also says it intends to adjust future versions of the report to include introducing a sustainability lens and the capacity to distinguish between SMEs and corporates.
“It’s far more sophisticated than its initial incarnation. It has its limitations, we all know that, but I think we should be proud of what we’ve achieved as an industry,” says Wilson. “Even though the dataset that we have today doesn’t give us a pretext for a fundamental rethink of how trade finance is regulated from a capital perspective, we can still say, ‘this is our experience over the past 13 years, and here’s why you shouldn’t be thinking of this is a risky asset’.”
Is it still needed?
In a recent meeting, the leadership of the ICC Banking Commission confirmed its commitment to evolving the Trade Register project, stating that it could still fulfil a market need.
What’s more, the choice of whether or not to continue with the register may not be entirely in its hands. “One regulatory body with significant influence warned us some years back that ceasing publication might be taken as a signal that default rates or other risk metrics in trade finance might be deteriorating,” Malaket tells GTR.
Wilson agrees: “This is not the time for banks to stop reporting on the performance of trade assets. As the economy goes into a downward cycle, I think it arguably becomes more important than ever to be able to show the performance of trade finance,” he says.
Whether the ICC Trade Register can return to its former glory of netting big wins for trade finance remains under question. However, for its proponents, this underutilised resource, if properly harnessed, still holds the potential to revolutionise the industry once again.