Short term finance is the critical lubricant for tradeand the real economy (80%+ of trade flows requirefinancing at least at one point along the chain):
Source: WTOA few constraints on trade finance and working capital:KYC/AML RequirementsA growing constraint is the cost of compliance,particularly with new regulations relating toKnow Your Client (KYC) and Anti-MoneyLaundering (AML) legislation, with the resultthat major international banks will not considerdeals worth less than US$10m-20m.Basel RequirementsHigher capital requirements will inevitably limitbanks’ ability to provide short term financingand reduce the availability of trade finance.Trade finance should not be included underBasel, given its short-term, self-liquidating andunleveraged nature and the extraordinarily lowlevels of trade finance default.Deleveraging, US liquidityThe retreat of European banks has beencaused by regulatory-induced deleveragingand the availability of US funding when mosttrade finance transactions are conducted inUSD (+80% of L/C business is done in USD).Lack of expertiseAs banks deleverage (usually by selling theirmost liquid trade portfolios first) andconsolidate, expertise becomes restricted andsometimes lost in the process.
ICC and the Basel issue:Ø Give regulators historical metrics to facilitate drafting andimplementation of the Basel frameworkØ Help policy makers assess the impact of regulations onglobal tradeØ Supply the industry with a reliable benchmarks onproducts to bridge the information gap in trade financeTHE ICC TRADE REGISTER & BASEL
Ø First ever quantitative analysis of Trade Finance (2009-11)Ø Export Finance characteristics added in 2012Ø Partnership with wide pool of participant banks (+25 today)Ø Establishment of representative data set (+15M trans.)Ø Focus on description of key (risk-related) characteristicsTHE ICC TRADE REGISTER
11.4M (60-70% traditional TF or US2.5t)Defaults<3,000Average tenor90NumbertransactionsTHE ICC TRADE REGISTERAverage recovery rate on writtenoff products 59.7%VarianceAroundaverageLoss rates Low(even when stress tocounterparties is arguably greatest- 445 defaults on 2.8M T in 2008-09)
THE ICC TRADE REGISTERMedium – Long Term Export Finance
ICC provided overwhelming evidence that ST TF instrumentspresent a low level of credit risk through the cycle1. Low default rates as compared to other forms of short-term lending2. Low exposure at default and short economic maturity3. Low levels of loss given default4. High recovery rates and therefore low write-downs5. Low rate of credit conversion from contingent to on-balance sheet exposureMLT EF instruments seem comparatively low risk, too(Low default rates as compared to other forms of mid-to-long term lending; Recoveryrates are relatively high)Summary
Ø ICC called to soften the impact of a number of aspects of Basel III on tradefinance has achieved success in a few areas:1. Exemption of LC from the one‐year maturity floor2. Reduction of the capital charge levied against trade loans to countries with lowsovereign debt ratings3. Relatively favourable new guidelines on liquidityØ However, further carve‐outs on leverage (CCF) for TF instruments to beobtained (but difficult, given the desire of BCBS to maintain the integrity of theregulations as a whole).Ø ICC is concerned that Basel III will not be implemented at a global level asintended by the G20 and BCBS, in terms of both content and timingØ CRD IV has a less punitive treatment of off balance sheet items:1. Low risk assets would be subject to a 20% CCF for the calculation of the leverageratio.2. waiver on the 1 year maturity floor had been extended to all trade financeinstruments, not only LCsWay forward
THE ICC TRADE REGISTERUnintended consequences?
TRADE FINANCE GAPSØ Total gap: 55–68 percent of formal SMEs (13.8–20.4 million) indeveloping economies are unserved or underservedØ Total value gap in credit financing of formal SMEs is $1.5–1.8 trillion,including high-income OECD countries
THE ICC TRADE REGISTERThe share of trade loans to total loans isvery limited in some emerging countries.$0$500$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,0002003 2004 2005 2006 2007 2008 2009 2010 2011 2012Other Loans & Advances Households Trade Loans
Conclusions-1-ICC is bridging the information gap and createda better understanding on how work tradefinance and export finance.
- 2 -ICC Register provided overwhelming evidencethat trade finance is a relatively low-risk assetclass.
- 3 -The ICC policy analysis provided a valuableleverage to engage into productive discussionwith the regulators and policy makers
Thank you!ICC Banking CommissionThe leading and trusted authority for tradefinanceThierry Senechal, firstname.lastname@example.org