Distributing trade finance products such as supply chain finance and short-term loans will become a “strategic necessity” for banks due to tougher capital requirements set to be phased in by the end of the decade, the International Chamber of Commerce (ICC) has said in the latest iteration of its Trade Register report.
Under global rules known as Basel 3.1, on-balance sheet products such as receivables and payables finance, as well as short-term import/export loans, will steadily consume more capital over the remainder of the decade, according to a public summary of the Register published on October 22.
Basel 3.1 introduced an “output floor”, which in effect hikes tier 1 capital for large banks that use internal models to calculate their risk-weighted assets. In the EU and UK, it is being phased in and will be fully implemented by 2030.
The changes are likely to translate into higher prices for “low-margin, balance-sheet-heavy products” and mean that “originate-to-distribute models that transfer mezzanine or residual risk to private-credit funds become a strategic necessity rather than a capital-markets experiment”, the ICC said.
“Capital is likely to become costlier, allowances may be more forward-looking, and cash-conversion cycles may become shorter, which may mean that only data-rich, distribution-ready trade desks can preserve returns.”
Distribution on the secondary market has long been a feature of trade finance, with risks purchased by other banks as well as institutional investors such as insurers and asset managers.
But investor appetite for trade finance risk remains limited compared to many other asset classes, and even some large banks with sophisticated distribution programmes only offload a small part of their trade finance portfolios.
The Register summary suggests that capital charges will make “originate-to-distribute funding models increasingly attractive to manage profitability and balance sheets”.
Digitalisation could help speed up secondary market activity by embedding data, Trade Register report chair and Standard Chartered’s global head of documentary trade Samuel-John Mathew wrote in the report: “For banks, the lesson from this year’s report is speed: to remain competitive, financial institutions must originate, price, and distribute in weeks, not quarters, using APIs and electronic documents that keep pace with moving certificates of origin.”
Defaults remain low
The Register is one of the main tools the ICC and wider industry use when attempting to convince regulators that trade finance is a largely low-risk product suite, such as during successful lobbying against mooted stricter capital treatment in the EU and UK.
As in most previous years, default rates for the bulk of products, such as export letters of credit (LCs) and performance guarantees, remained close to long-term averages.
Higher transaction- and obligor-weighted defaults in import LCs and trade loans suggest higher defaults among SME obligors during 2024, with a “notable uptick” in defaults in Asia Pacific.
The Register said payables finance “remains among the lowest-risk trade finance product on an exposure-weighted basis, with a default rate only marginally above that of export letters of credit”, most likely due to banks only providing programmes to large corporates with strong credit quality.
The full default rates are not included in the public summary of the Register, but John-Mathew wrote that they remain below 0.3% overall.
The resilient LC
Despite the growing use of supply chain finance – which includes both receivables and payables programmes – in recent years, the product suite has faced some hurdles.
The ICC said supply chain finance volumes fell in 2024 due to a “slow-down” in Asia and the Middle East. But a stronger performance in Europe is likely to propel annual growth of 4% over the next five years.
Loans and documentary credits are also set to remain the revenue engines of trade finance until at least the end of the decade, the report predicts.
Together, payables and receivables finance only accounted for 11% of overall nominal trade finance revenue of US$61.9bn in 2024, while trade loans provided almost half of the total.
Documentary trade is forecast to make up 40% of revenue by 2030, although the ICC expects annual growth in revenue from the products to fall to 3.1%, compared to 4-4.2% for other products.
“Growth in trade finance has seen a gravitation towards working capital products over the last decade, leaving documentary trade revenues to grow more slowly between 2020 and 2024,” the ICC said in the report.
But it added that “2025 may yet see a resurgence of the traditional letter of credit” due to tariff disruption and increased regulation, and said documentary trade “is expected to remain a core component of the trade finance market well into the 2050s”.
Improvements planned
The Register has long been plagued by limitations on the data it collects, chiefly due to the small group of banks that participate in it, despite attempts to improve engagement by the ICC Banking Commission, which oversees the report.
The number of banks that contributed to the report in 2024 remained the same as the previous year, at 26. While the lenders account for a large share of global trade finance activity – just over 55 million transactions have been captured since 2008 – most are headquartered in Europe.
John-Mathew wrote that to keep the Register relevant, there are plans to further integrate “key themes such as sustainability, digitalisation, and AI”.
The ICC also intends to make the report more comprehensive in coming years, including by gathering data on operational and sales efficiency, and including trade credit insurance to give a fuller picture of defaults.
