Trade finance continues to be low risk.
Summary: Newly released data from the International Chamber of Commerce affirms the low risk nature of trade finance against comparable asset classes
The International Chamber of Commerce (ICC) has released its sixth annual Trade Register. The report covered $9.1 trillion of exposures and 17 million transactions, more than it has ever done before. The ICC claims that the data verifies trade finance as presenting banks with little credit risk.
Short-term products are particularly low risk, according to the Trade Register, with a default rate (weighted for exposure) of 0.08 per cent for Import Letters of Credit (L/Cs), 0.04 per cent for Export L/Cs, 0.21 per cent for Loans for Import/Export and 0.19 per cent for Performance Guarantees.
Furthermore, medium and long- term products were also shown to be low risk in the report. This was partly driven by the fact that in-scope transactions are covered by OECD- backed Export Credit Agencies (ECAs), of up to 95 per cent of their value. The average default rate of medium to long term trade finance was found to be 0.44 per cent with a loss given default (LGD) of 5.3 per cent. This drives an expected loss of 0.024 per cent.
The report noted that whilst these figures are low compared to many other asset classes, they are marginally higher than the figures that have been reported previously between 2007 and 2014, due to increases in both default rate and LGD.
In a press release the ICC stated that, "While the latest data reveals a slight upward trend in default rates from 2013 onwards--due to a mix of one-off events, such as the default of a large importer, and more systemic factors--the overall trend still confirms the low risk nature of trade finance."
"The Trade Register aims to objectively further increase the attractiveness of trade finance to banks, and in turn, benefit global trade and financial inclusion," says Daniel Schmand, Chair of ICC Banking Commission. "It also confirms that trade finance should be increasingly recognised as a reliable asset class by institutional investors, with scope for high yields and low volatility."
"Year on year the Trade Register has demonstrated the low credit default risk nature of trade finance instruments," says Alexander Malaket, Chair of the Trade Register Project and Deputy Head of the Executive Committee of the ICC Banking Commission. "Trade finance is crucial to global trade flows, which in turn are the driving force behind global economic growth across industries and markets. This is precisely why we continue to enhance the quality and the robustness of the data and related advocacy, aiming to provide objective data for discussions between regulators and industry stakeholders."
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