Related News

Hopes for interoperability as DSI finalises digital trade document standards

“Wake-up call”: LEIs could cut trade costs by US$100bn, industry argues

ICC issues call for action on Trade Register as regulatory pressures bite

WTO warned of “historic setback” as digital trade pact hangs in the balance

Dollar alternatives not a major illicit finance threat, US says

New data shows that trade finance transactions are more than 30 times less likely to default than other forms of lending.

A wide-reaching report commissioned by the International Chamber of Commerce (ICC) found that of more than 8 million short-term trade finance transactions, worth over US$2tn, fewer than 1,800 defaults were reported, which equates to a default rate of about 0.02%. For investment grade one-year corporate loans, as rated by Moody’s, the average default rate is more than 0.6%.

While longer-term trade finance loans have a higher risk profile, around 1.11%, they still carry significantly lower risk than the average default risk across all Moody’s-rated deals from 2008 to 2011, which is 2.41%.

Global Risks Trade Finance Report 2013 pools data from 21 major banks, who contributed 65% of the world’s total trade finance transactions over the period covered. It is the strongest card the ICC has played to date in its battle to have trade finance treated differently by the Basel III committee to those banking practices that are perceived to be more risky.

The report makes no recommendations to the Basel III committee, with the ICC’s Banking Commission chairman Kah Chye Tan telling GTR that the results speak for themselves. However, it’s hoped that the committee will move to categorise trade finance transaction in a different band than normal loans.

Tan praised the adjustments that have been made to Basel III’s leveraging regulations to date. Trade finance loans can now be backed by small stocks of easily sold assets, as opposed to cash reserves. But he implied that the changes don’t go far enough.

He cites the example of the Basel committee’s asset value correlation (AVC) categorisation as an area in which more consideration needs to be given. Currently, consumer products such as credit cards and mortgages are classed separately, given the fact that they have different tenors, behavioural and payment patterns.

For corporate banking products, however, there is no such differentiation and so trade finance is treated in the same manner as a standard corporate loan.

“We’re sure the EU and Basel authorities have made positive changes,” Tan tells GTR from an ICC event in Lisbon. “Trade is a low-risk business and the changes they’ve put in thus far are the right thing. But is that enough? Should trade finance be using the same AVC as a normal loan?”

The commission is also keen for harmonisation of the Basel regulations across the globe. The EU is considering further changes to its leveraging rules. But, according to Tan, the changes will lead to arbitrage if they’re not uniformly adopted globally.