Article

It was in 2009 that ICC and the Asian Development Bank (ADB) decided to establish a major project, the ICC Trade Finance Register, to collect performance data on trade finance products. This initiative aimed to help the industry develop a pool of data to substantiate the argument that trade finance was, relatively speaking, a low-risk form of financing. The October 2011 report, Global Risks - Trade Finance,, reinforced findings of earlier reports. Excerpts follow:

1. "The data pooled within the ICC Register supports the view that trade finance is a low-risk asset class, including the following findings:

a. Short tenor of trade transactions.

The average un-weighted tenor of all products in the dataset 2005-2010 is 147 days; the off-balance-sheet products covered by the ICC Register (import L/Cs payable at sight average length is 75 days, usance import L/Cs 126 days. Sight and usance export confirmed L/Cs exhibit average tenors of 103 days, and performance standby L/Cs' and guarantees' average tenor is 451 days.

b. Low default and loss across all product types.

Fewer than 3,000 defaults were observed in the full dataset of 11.4 million transactions. Default rates for off-balance sheet trade products were especially low, with only 947 defaults in a sample of 5.2 million transactions. These low rates of default and loss are consistent with the ICC's theoretical understanding of the mechanics and context of trade financing. Using a standard calculation, ICC calculated the following average default and loss rates within each product type over the three focus years of this report (2008-2010):

i. import L/Cs, default 0.077 percent, loss 0.007 percent

ii. export confirmed L/Cs, default 0.09 percent, loss 0.03 percent

iii. standbys and guarantees, default 0.013 percent, loss 0.0007 percent

iv. import loans - corporate risk, default 0.06 percent, loss 0.07 percent

v. import loans - bank risk, default 0.09 percent, loss 0.05 percent

vi. export loans - corporate risk, default 0.29 percent, loss 0.017 percent

vii. export loans - bank risk, default 0.17 percent, loss 0.01 percent

2. Relatively few losses through the global economic downturn.

Fewer than 500 losses were recorded out of more than 7.5 million transactions in 2008, 2009 and 2010. Indeed, the number of losses on some products (for example, import loans and L/Cs, guarantees, and standby L/Cs) remained negligible throughout this period (269 out of more than 4 million transactions) despite prevailing economic conditions and higher transaction volumes.

3. Limited credit conversion from off - to on-balance sheet.

Counterparty default, unlike, for instance, credit default swaps, does not in itself automatically result in the conversion of contingent trade products from off - to on-balance sheet. From the data, ICC found that documentary and (implied) performance contingencies inherent in trade products, mitigated potential defaults for on-balance sheet exposures. In the case of import L/Cs, for instance, an average of 70 percent of document sets presented to banks to make drawings under import L/Cs contained discrepancies on first presentation. In these cases, the bank has no obligation to waive the documentary discrepancies and make payment unless it receives reimbursement or unless the discrepancies are corrected within the validity period of the L/C.

4. In summary, the Global Risks - Trade Finance 2011 data supports the view that traditional trade finance, such as letters of credit, has a very low loss experience. Contingent liabilities such as these do not convert to "on-balance sheet" liabilities when paid because the issuing/confirming bank reimburses itself immediately from its client and is typically heavily collateralized. Trade loans to corporates and banks carry a very low loss history and defaults do not necessarily result in write-offs."