A new report released today by the International Chamber of Commerce (ICC) provides empirical evidence that, in all forms, trade and export finance is a low risk bank financing technique – further supporting ICC’s advocacy of trade finance as a strong contribution to economic recovery and growth. The group says this evidence has the potential to alter attitudes towards trade finance, and therefore contribute to the growth of both global trade and the global economy.
Based on data contributed by the major global commercial banks and reflecting more than 4.5 million transactions totalling an exposure in excess of US$2.4 trillion, the ICC Trade Register Report 2014 (“the Trade Register”) empirically demonstrates that trade finance is lower risk than many other types of financing and assets. It records that short-term trade finance customer default rates range from a low of 0.033% to a high of 0.241%, which is a fraction of the 1.38% default rate reported by Moody’s for all corporate products (according to 2012 figures).
The report offers those involved in trade — whether in business, finance, government or multilateral institutions — a tool for understanding the risks, which should support liquidity and the regulatory oversight of the technique. Around 80-90% of cross-border trading activity relies on some form of trade finance, making the regulatory treatment of instruments such as letters of credit (L/Cs) and pre-export finance vital for the health of the world’s economy. In fact, it was the market’s concern that the regulatory requirements were subjecting trade finance to disproportionately stringent capital-adequacy standards that encouraged ICC’s Banking Commission, through an initial partnership with the Asian Development Bank, to initiate the Trade Register in 2009.
“The intention of the Register was to progress the understanding of trade finance, its importance to global trade and its highly-effective risk mitigation capabilities,” explained Kah Chye Tan, Chair of ICC Banking Commission. “The impact of the Register, however, is much greater. As the latest results show, the Register provides concrete fact-based evidence that trade finance is low risk which, if fully reflected in capital requirements, would help banks to give companies the financing support they need for their exports, and to contribute even further to the global economy as it recovers from the global financial crisis.”