Trade and Export Finance Maintains Low Risk Profile - Global Trade Magazine
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  March 27th, 2018 | Written by

Trade and Export Finance Maintains Low Risk Profile

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  • Trade finance products maintain their favorable credit risk profiles compared to similar asset classes.
  • Trade finance products characterized by low default rates and short time to recovery.
  • A slight increase in expected trade finance losses is being driven by a small rise in default rates.

The International Chamber of Commerce (ICC) Banking Commission has released its 2017 Trade Register report—Global Risks in Trade Finance. The report reveals the low-risk nature of transactions that support global trade, and confirms that trade finance products continue to present banks with low levels of credit risk.

The 2017 report, produced with support from ICC’s project partners, The Boston Consulting Group and Global Credit Data, draws on information from 22 member banks to present a global view of the credit risk profiles of trade and export finance transactions. It is based on over $10.5 trillion of exposures and more than 20 million trade finance transactions from 2008 to 2016. The trade finance products in the register are Import Letters of Credit (L/Cs), Export L/Cs, Loans for Import/Export, and Performance Guarantees, and the 2016 Trade Finance data set includes approximately 40 percent of global traditional Trade Finance flows, excluding Loans for Import/Export.

“The 2017 Trade Register reiterates what we have seen year on year since the project was initiated in 2009: that trade finance is a reliable and low risk asset class and should be looked upon favorably by regulators, industry stakeholders, and institutional investors,” said Daniel Schmand, Chair of the ICC Banking Commission. “As the regulatory treatment of trade finance evolves, fact-based and data-supported advocacy around the characteristics of trade finance continues to be crucial.”

The latest trade finance findings reveal that the expected loss of trade finance products continues to compare favorably against other similar asset classes such as large corporate and small/medium enterprise lending. Obligor-weighted default rates from 2008 to 2016 are low across all products and all regions, at 0.38 percent for import L/Cs, 0.05 percent for export L/Cs, 0.80 percent for loans for import/export, and 0.47 percent for performance guarantees. This is coupled with short times to recovery and relatively similar loss given default rates to comparable asset classes.

Export finance also presents a very low risk for banks, with low expected losses deriving from a combination of low loss given defaults (LGDs) and probability of defaults (PD). Export finance’s particularly low LGD is partly because most transactions are covered by OECD government-backed ECAs at approximately 95 percent of their value, minimizing the sum a bank may need to pay out. In 2016, export finance saw a slight increase in expected losses driven by small growth in annual default rates, consistent across all asset categories except financial institutions.