A view from the ICC: Changing times call for a collaborative approach
The International Chamber of Commerce (ICC) Banking Commission’s new head of policy, Olivier Paul, discusses how the Banking Commission’s role will be critical as the trade finance industry adapts to unprecedented change.
There are some fundamental challenges ahead for trade finance: involving the regulatory landscape, the technological evolution of our industry and the vital inclusion of new non-bank sources of liquidity. These changes will involve everyone, meaning we will all need to adapt, including the ICC Banking Commission, where I recently became head of policy.
Yet I remain optimistic. For trade finance as a discipline, I am convinced that its best years are ahead of it, as long as we can embrace the future and view change as part of an evolutionary process rather than an existential threat. In fact, I see the Banking Commission’s role as vital for preparing the industry for that future, as well as being an advocate and influencer of the changes underway.
Just 20 years ago the most important role for the Banking Commission was rule-making, with advocacy a second, though still important, function. Since the 2008 financial crisis, however, these roles have been reversed, with advocacy of trade finance now the Banking Commission’s most critical function.
Why? Because both the regulatory and the market response to the crisis have inadvertently presented trade finance with constraints that are impeding our industry. One unintended consequence of this has been a marked widening of the trade finance gap (between the supply and demand for trade finance), which has grown to reach a deeply-concerning US$1.6tn (according to the Asian Development Bank). This means US$1.6tn of potential trade has been impeded or lost due to a lack of available financing – a sobering number and an issue the Banking Commission is determined to address.
Hence our focus on advocacy: a role that defends trade finance as a discipline while also encouraging workable changes to the trade finance environment. Our goal is to promote the truth about trade finance, while also promoting a more level playing field for trade finance providers globally.
The elevated role of advocacy is not to denigrate our rule-making role, however – not least because it’s here where we can help trade finance absorb change. For instance, one of the most important market-changing trends is the current digital revolution. Far from being a threat, digitalisation can greatly benefit trade financers with respect to efficiency, costs and transparency – as well as in encouraging new entrants.
Now, and in the future, the Banking Commission expects to play an important role in helping to integrate digital trade finance tools, as well as the non-bank providers of these tools, into the trade environment. Recently, we launched a Working Group to accommodate trade finance digitalisation – aimed at enabling connectivity and collaboration between stakeholders to ensure a wider adoption.
A key trigger for the Banking Commission’s current work remains, however, the US$1.6tn trade finance gap – a deficit highlighting what I see as the biggest challenge faced by the industry in a generation: that we cannot generate enough supply to meet the current demand for trade finance – a fact confirmed by 61% of bank respondents in our 2017 Global Survey of Trade Finance.
While the trends underpinning the gap are multifarious and complex, it is impossible to escape the conclusion that one of the key reasons for the deficit is the hardening regulatory environment for trade. Regulators – in an understandable response to the global financial crisis – have significantly increased the cost of trade transactions for banks. A key objective of the Banking Commission is, therefore, to raise awareness of trade finance – and its true characteristics – in order to advocate a more workable regulatory environment for the discipline.
Here, we have had some success – aided by our work with the Trade Register to empirically measure what we all knew from experience to be intuitively true: that trade finance is a low-risk asset class despite involving emerging market destinations and obligors.
Yet such advocacy is a long way from our sole purpose – important though that is. For us, it is clear that – to be bridged – the trade finance gap requires new sources of funding especially from non-bank providers of liquidity.
So we need to welcome these new funders into the industry – and, indeed, encourage non-banks to play a greater role in the future of trade finance. While the majority of financing is still undertaken by banks – both globally and locally – new actors can potentially transform the trade finance landscape. This applies to challenger banks and fintechs, in addition to new sources of liquidity such as insurers and pension funds, as well as specialist funds that have noticed the low-risk attributes of this emerging asset class.
Although this is a welcome change, the Banking Commission aims to integrate these new actors in a way that is not detrimental to the rules-based trade finance we both advocate and officiate.
Smoothly integrating new technological developments is another potentially beneficial move. For decades, letters of credit, and other trade financing tools have remained largely paper-based and unchanged. And, despite the growth of open account, continue to play a signicant role – accounting for around 10% (or US$1.5tn) of global trade flows. Yet with the digital revolution in trade finance well underway, the way banks manage and monitor the digitalisation of these tools will be critical.
Accommodating market constraints and risk
With both new players and digitalisation, collaboration between parties is key. Fortunately, the post-crisis atmosphere has encouraged collaboration. This is true of both international organisations such as the ICC (working with other multilateral organisations and even obtaining observer status at the United Nations). But it is also true between banks, and especially between banks and new players such as pension funds and fintechs.
All have their part to play, and the Banking Commission can help facilitate collaboration through both rule-making and data sharing. Of course, the Trade Register is one such area of cross-bank collaboration – one that has a highly beneficial impact by showing both internal and external supervisors the low-risk nature of trade finance.
The Register was originally-focused on aiding constructive dialogue with regulators that could, hopefully, result in trade finance winning better treatment with respect to regulatory constraints, ratios and the levels of regulatory capital required. Yet banks have increasingly used the Register for risk modelling and to report results and findings to their respective regulators and internal supervisors – showing the potential for the Register to become a Basel-compliant assessment tool, as well as demonstrating the benefits of data pooling.
Our Global Survey is another collaborative exemplar. With responses from 255 participating banks located in 98 countries (as well as contributions from various leaders in their field), it is the largest of its kind for the trade finance industry. The Survey eloquently expresses the evolution of market constraints, especially since the crisis – helping banks and corporates develop their own tools and strategies, as well as gain further insight into their own budgets and capacities.
Advocating a level playing field
But reducing the trade finance gap is also about developing standards that help banks raise the level of their lending capacity, as well as allowing new players to add their liquidity on a sustainable basis – ie by adopting universal rules and by generating a universally-accepted rules-based approach to trade finance. So the Banking Commission as a rule-making body remains highly relevant.
A key part of this is reducing the risks of protectionism, which is why we are now working with the World Trade Organisation (WTO) to establish new trade recommendations for all nations. We believe that, if we are able to establish a level playing field for trade, we will reduce the number of people crying “foul” (sometimes with strong justification), which will allow protectionist voices to be effectively countered by those advocating global trade.
Certainly, trading by the same rules, standards and regulations – a key ICC mission – will ease the trade finance process, which should help close the trade finance gap. And it just might help silence those protectionist voices too.
Of course, protectionism is not directly related to financial constraints – so it cannot necessarily be blamed for the trade finance gap. In this regard, we believe that the further inclusion of small and medium-sized enterprises (SMEs) into mainstream trade financing is vital for encouraging trade growth and for closing the gap. Approximately 60% of businesses have their bank lending applications rejected – the vast majority of these being SMEs.
The need for SME inclusion in trade finance is particularly acute in Africa, where a large number of potential SME exporters cannot find financing. Yet this also impacts OECD exporters. Our 2016 Global Survey revealed that 66% of business found “access to finance a significant obstacle to trade in Africa”.
Again, this is a matter of increasing capacity while creating a level playing field. And a significant portion of our efforts have this motivation in mind.
Digitalising trade finance
Perhaps the greatest disruption for trade finance will come via digitalisation, however. Here, I see a key role for the Banking Commission in facilitating this change – particularly with respect to the exchange of data and documents and in enabling industry players to seamlessly and instantly connect.
As of now, we are in the process of reviewing all existing ICC rules, then conducting technical and legal discussions on how to adapt them to digital innovation. And at a later stage we will create standards to on-board third-party providers. The aim here is to attract non-bank providers – including fintechs – to apply the standards we develop so that there is harmonisation across the industry, which will aid efficiency and liquidity.
Far from a protectionist move, standardisation should allow new players the bandwidth to be innovative – while bringing the benefits of transparency, compliance and reduced operational risk to all. Of course, this is a key focus area for the digitalisation Working Group, with the goal of extending inclusivity and, yes, bridging that trade finance gap.
Certainly, we must encourage the industry to restructure in ways that successfully absorb the significant technological changes underway. The Banking Commission has a major role to play in this respect – ensuring that the rules of today, which are shared among 90% of the banking industry, stay relevant.
Overall, we view digitalisation as potentially of great benefit to the trade finance industry – for both existing and new players. Yet that does rely on the rules-based approach remaining intact. Given this, the Banking Commission is determined to play a significant role in developing workable standards that support this brighter future. And that even includes developing standards for blockchain.
Bringing the trade finance community together
Core to the Banking Commission’s philosophy is how it goes about facilitating change. Our activities are based on the existence and development of different initiatives: executed through working groups, work streams, workshops and more. These are formalised, monitored, discussed and renewed twice yearly at our Annual Meeting and Technical Meeting. Such formality aids both transparency and inclusivity and is – for us – the bedrock for managing sustainable change.
And that brings us to a final significant role for the Banking Commission – in bringing the trade finance community together: to take changes into account; to assess them with respect to their potential impact on the industry; and to develop sustainable responses that advance rather than hinder the industry’s progress.
Both of the Banking Commission’s major membership forums involve discussions on the market, the global situation, big trends and our global strategy. For instance, the main topic discussed during the last Technical Meeting was advocacy – in other words, the actions required by the Banking Commission to help accommodate new regulations such as Basel III and IV.
A lot of our time is dedicated to managing dialogue on such topics, which are first generated by the Advisory Board and the Executive Committee. The meetings provide opportunities to update the membership and the wider trade finance community of the work underway – bringing the entire community together to discuss the issues and influence the agenda.
Certainly, open conversation and facilitation between our members and the wider industry remains a critical pillar of the Banking Commission’s role, not least because this ensures the trade finance industry remains fit for purpose. In this, I think we do a rather good job – although we are always open to evolution and improvement.
take me back