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The International Chamber of Commerce (ICC) is renewing calls for more effective bank contributions to its Trade Finance Register, as the industry battles for more favourable regulatory treatment for trade finance transactions. 

The register, launched by the ICC’s Banking Commission in the wake of the global financial crisis more than 15 years ago, has consistently shown low default rates across a range of trade finance products. 

Its most recent iteration, which captures nearly a quarter of trade finance transactions in 2022, is significant as it shows the industry’s emergence from the disruption caused by the pandemic.  

Data provided by participating banks shows that while default rates generally increased compared to 2021, they remained below the levels for 2020.  

Products covered include import and export letters of credit, performance guarantees, supply chain finance and export finance, across more than 47 million transactions with exposures of more than US$23tn. 

The data “support[s] the view that the immediate aftermath of the Covid-19 pandemic has not seen a significant increase in defaults”, the ICC says in the report. 

“This… continues to reflect the finding from past years: trade finance and export finance represent a low-risk asset class even at times of market uncertainty.” 

However, banks face an uphill struggle to persuade regulators that trade finance should be viewed more favourably than other financial products, denting its appeal to investors and raising the cost of financing. 

As part of the Basel 3.1 reforms in Europe and the US, for example, authorities initially proposed to raise banks’ exposure risk for off-balance sheet products – including standby LCs, performance bonds and technical guarantees – from 20% to 50%. 

Despite some industry success in pushing back against those proposals, there are still concerns elsewhere, including US plans – as part of its implementation of the Basel framework – to class any bank debt more than 90 days overdue as a defaulted exposure. 

The ICC sees the Trade Register as a vital tool in making its case to authorities, particularly now it shows that the market remained robust despite the unprecedented upheaval to global trade flows during the pandemic. 

“The lived reality is that trade finance is low risk,” said ICC secretary general John Denton, speaking on the sidelines of last month’s GTR Mena event in Dubai. 

“But the way in which it’s characterised by the Bank for International Settlements is actually the same level of risk as complex derivatives, which means it’s more expensive and there is less available.” 

The organisation has long battled to capture information from a wider segment of the banking industry. As Denton tells GTR, the market still “lacks sustainable economic modelling and a data-by-data set”. 

“With a better basis of data, we can make the case much more strongly,” he says. “That enables us to be even stronger in our discussions about how trade finance should be treated in terms of risk-weighting.” 

Gabriel Petrus, the ICC’s global head of strategic partnerships, tells GTR he is seeking to engage more banks, noting that the Mena region, Latin America and Africa remain under-represented. 

“Expanding the Trade Register’s outreach will continuously help regulators and leaders from the banking industry to understand how they can improve the mechanisms for trade finance, what the market trends are in each region, and ultimately how they can address the trade finance gap,” he says. 

“We would like to mobilise a call of action in those regions to help participate in the next round of the Trade Register. Further data from banks based in those regions could potentially help modernise standards globally, which will help address the trade finance gap in developing countries.” 

 

Seeking granularity 

Steven Beck, head of trade and supply chain finance at the Asian Development Bank (ADB) – which initially partnered with the ICC to launch the register in 2009 – agrees it “continues to play a role” in authorities’ decision making. 

“But the feedback from the regulators and banks is that the data just isn’t granular enough or uniform enough, and it needs to be from a broader cross-section of the industry,” he tells GTR. “There’s a real opportunity for us to make a much bigger difference here, but we need to step it up.” 

While engaging more banks will help, Beck adds that improvements are also needed in terms of the data collection itself. 

“We also need standardised data, because the data that comes in from banks is a hodgepodge of different things, so you’re not necessarily getting consistent data,” he says. “Achieving more granularity will help in having an even more robust discussion with regulators and financial institutions’ risk management departments.” 

He gives the example of Pakistan, which has frequently grappled with securing key imports due to its low foreign currency reserves and poor availability of letters of credit. 

“Throughout all of Pakistan’s economic and political crises, we don’t know of a single default on a letter of credit transaction, but at the moment we don’t have the empirical hard evidence to show that is the case,” Beck says. 

“If the register could get to that level, just imagine the development impact it could have, in terms of releasing capital and closing the trade finance gap.” 

The register itself is continuing to evolve. The most recent report was the first time sustainability tagging was included for export finance products, which the ICC hopes will clarify whether sustainable transactions demonstrate favourable risk characteristics. 

Looking ahead, the ICC plans to include receivables finance transactions in future iterations, as well as an SME tagging process that will determine risks associated with SME trade in particular.