ICC Trade Register – market trends in trade finance from COVID-19 and beyond
by David Bischof, Deputy Director, Finance for Development, International Chamber of Commerce
In its 11th year of publication, the ICC Trade Register Report continues to be the authoritative risk assessment benchmark for trade finance products. In turn, the latest edition highlights the implications for trade finance in light of the COVID-19 pandemic, while confirming the low-risk nature of trade, export and supply chain products, explains David Bischof, Deputy Director, Finance for Development at the International Chamber of Commerce (ICC)
Trade finance is complex, meaning that banks need precise and timely information to accurately assess risks. The ICC Trade Register does exactly that – playing a critical role by providing data-driven, objective and transparent information with respect to credit-related risks within trade and export finance products.
Capturing a full decade of data, this year’s report – containing over US$15 trillion of exposures and 32 million transactions from 2008 to 2018 – reinforces the view that trade finance products present banks with exceptionally low levels of credit risk. The figure below shows that the default rates, weighted by the obligor, are low across all products and regions, averaging 0.36% for import letters of credit, 0.04% for export letters of credit, 0.73% for loans for import/export and 0.45% for performance guarantees.
Unprecedented times for global trade
The unpredictable spread of COVID-19 has disrupted the world around us – and trade is no exception. In turn, it is important to acknowledge these figures – even more so during these uncertain times – confirming that relative to other banking products, trade finance instruments remains a low-risk asset class.
Even after the pandemic has passed, international trade may still be constrained by long-term changes in commercial behaviour and public policy. But given the scale of financing required to support a rapid rebound in global trade flows — potentially as much as US$5 trillion — it is increasingly important for all stakeholders to ensure that trade finance products are correctly understood for their credit-risk profile and potential to play a central role in driving a post-COVID-19 recovery.
Certainly, as the banking environment continues to evolve and respond to the changing political, economic, and regulatory milieu, trade finance instruments will also need to adapt and evolve. In this context, the Trade Register intends to expedite its data collection to present a comprehensive view and inform policy and regulatory decisions of how COVID-19 impacted the risk profile of trade financing products.
Analysis of supply chain finance
In the meantime, last year’s edition of the Trade Register marked an important step in its history by including supply chain finance (SCF) for the first time. This latest report builds on that foundation to once again analyse SCF data, with a continued focus on payables finance.
Certainly – with ongoing dialogue, advocacy and engagement between regulatory authorities and industry leaders – the regulatory treatment of SCF is evolving, making SCF an important area for analysis. In turn, the Trade Register has gathered data on US$133 billion in exposures and 2.4 million SCF transactions. Collecting such data is anticipated to aid the design and delivery of regulatory regimes that align with the risk characteristics of SCF while achieving regulatory objectives that do not undermine its access.
The data gathered indicates a probability of default for SCF comparable to that of other trade finance products. Indeed, obligor-weighted default rates for SCF in 2018 were 0.23%, an increase from 0.11% in the previous year, yet lower than all documentary trade finance products included in this year’s report. Of course, the data set remains small compared to traditional trade finance products. Yet its inclusion is an important step in the expansion of the scope of the Trade Register – and the collection of SCF data is expected to increase to substantiate this result in subsequent editions, as the figure below shows:
Trade, export and supply chain finance are essential engines of global trade – not least in providing low-risk financing methods across a range of maturities for importers and exporters who are often transacting with unknown or distant counterparties. What’s more, in light of the COVID-19 crisis, the industry and regulators need not only past risk data, but also a timely and nimble understanding of the current climate.
As such, the utility of the Trade Register is not only in its analysis of risk data but also in its inclusion of high-quality data-driven and qualitative insights from a range of industry experts.
The latest report marks a big step in improving the value it delivers to industry participants. Nonetheless, there remains significant room for improvement. By continuing to explore ways to enhance the scope of the Trade Register, improve data quality, and refine the methodology used, the Trade Register aims to reinforce its relevance and credibility as an industry asset in the argument for the favourable regulatory treatment of trade, export and supply chain finance.
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