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Documentary Credit World

Documentary Credit World (DCW) - Nov/Dec 2023 Vol. 27 No.10 section - Updates

Latest ICC Trade Register Shows Recent Blip, but Trade Finance Still Low-Risk

ICC released access to a 28-page summary of its 2023 Trade Register Report on 3 November. The ICC Trade Register covers credit risk and default rates for import letters of credit, export LCs, performance guarantees (including standby LCs), and supply chain finance exposures. It analyzes data provided by 26 trade finance and export finance banks, amounting to over 47 million transactions with exposures of more than USD 23 trillion and accounting for about 23% of traditional trade finance flows and 7% of all trade flows globally in 2022.

FinCEN Takes Next Step in Final Rules for Implementing CTA

On 21 December, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued its final rule that establishes the framework for access to, and protection of, beneficial ownership information (BOI). This access rule takes effect 20 February 2024.

It is the second of three key rulemakings to implement the US Corporate Transparency Act (CTA). The first, the BOI Reporting Rule which takes effect on 1 January 2024, requires certain corporations, companies, and other similar entities created or registered to do business in the US to report information about their beneficial owners to FinCEN. While banks and other financial institutions subject to US regulations are not responsible for their customers reporting BOI, they are encouraged to direct customers inquiring to FinCEN for BOI guidance materials and information.

The third phase of rulemaking will involve FinCEN’s revision of its Customer Due Diligence (CDD) rule.

After introducing its scope and extent, the Report then considers trade & trade finance market trends, including the 2022 global trade slowdown, factors contributing to sluggish growth forecasts for the future, and implications for trade and supply chain finance going forward.

In summarizing its analysis of trade, supply chain, and export finance, the Report compares 2021 and 2022 data to offer general observations of default rate trends. Although default rates across all four trade finance products increased in 2022 from 2021, they “remained in line with the pre-pandemic historical trends” seen in previous installments of the Trade Register. Each of the products in brief:

Import LCs – Global exposure-weighted default rates nearly doubled from 2021 to 2022, the highest value since 2009. Of note, this uptick was likely due to a small number of high-value defaults and defaults were largely geographically concentrated in Asia-Pacific (particularly China) and Central & South America.

Export LCs – While these default rates continue to remain “significantly lower” than for other trade finance products, default rates for export LCs on all measures doubled in 2022 from 2021. ICC reports that export LC defaults were “almost exclusively attributable to Russian bank exposures.”

Loans for Import/Export – Default rates doubled in 2022 relative to 2021 for loans for import/ export. ICC hypothesizes this is due to higher inflation, energy supply disruptions, and perhaps the winding down of government pandemic-related support in 2022.

Performance Guarantees/Standbys – Default rates increased from 2021 to 2022, but remained below levels seen from the available data of previous years.

In the area of supply chain finance, ICC focuses specifically on payables finance and has now accumulated data over a six-year period. On a transaction-weighted basis, 2022 default rates fell from 2021, but remain higher than pre-pandemic levels. On an obligor-weighted basis, defaults for SCF payables finance increased “considerably” from 2021 to 2022. According to ICC, “these trends suggest a small rise in defaults among smaller mid corps”, possibly related to “a weakening credit environment, as financing costs rose.”

As for export finance, data available to ICC showed that “default rates have largely increased across regions in 2022, returning to a level just below the historical average, and reversing a trend in declining rates from 2018 to 2021”.

The summary report concluded with remarks on the future of the Trade Register, including ICC’s goals to increase participation, utilize legal entity identifiers (LEIs), expand product coverage to receivables finance, and incorporate sustainability tagging for export finance products into its findings with the hope of ascertaining whether more sustainable transactions demonstrate favourable risk characteristics.

The full version of ICC’s 2023 Trade Register Report is available to participating banks or for public purchase by contacting ICC.