Article

DCI Can you give us a little background about ICC's Global Survey on Trade Finance - why it was established, its participants and what it is intended to accomplish?

O'Brien It really goes back to the last quarter of 2008 when we had the onslaught of the financial crisis. ICC was participating in the WTO Expert Group at that time. In the meetings, it became clear that there was a lack of reliable information about what was happening operationally in trade and trade finance at that time.

Pascal Lamy, the Director of the WTO, needed information for a forthcoming meeting and, given ICC's central position, particularly in trade and trade finance, we were chosen to lead this initiative.

DCI And the participants?

O'Brien ICC is working in partnership with the WTO, the World Bank and SWIFT, and we also have the major development banks, including the IFC, the private sector arm of the World Bank; the European Bank for Reconstruction and Development (EBRD); the Inter-American Development Bank (IADB) and the Asian Development Bank (ADB).

But to get particular information on what's happening operationally in relation to letters of credit, guarantees, standbys letters of credit and defaults, discrepancies, etc, we conducted a Survey among commercial banks and received feedback from more than a hundred countries. And it is still growing.

DCI Who was the Survey intended to inform and influence?

O'Brien In the first instance, it was driven by a particular objective and that was to get information for the G20 meeting for the WTO. But the interest on the feedback and analyses has proven to be astronomical. Commercial banks around the world, trade service providers, even exporters and importers, have been very keen to obtain up-to-date data provided in our Survey regarding what is happening in international trade and finance. So, it is expanding dramatically.

DCI The first Survey that came out in 2009 came on the heels of the trade and financial crisis in 2008. What were the most striking findings at that time with regard to the impact of the crisis on trade and trade finance?

O'Brien The striking thing at that time was during and after the last quarter of 2008 when we had the financial crisis, trade basically collapsed and the ensuing negative consequences have been felt since. There has been some recovery, trade is growing again and trade finance is not as tight as it was before. But there are still a lot of issues and challenges in the market. It is still very tough going.

DCI Are there indications that the Survey has had an impact?

O'Brien Absolutely. Pascal Lamy said that our Survey and the information we provided played an important role in the G20 leaders' agreeing to provide trade support estimated in the range of around US$250 billion. Now, that is a big number and it is hard to know how it actually would be applied. But even looking at the development banks, following the information from our Survey, they have all dramatically increased their trade finance limits in terms of risk coverage and liquidity to provide the market. So, we do feel we played a large part in this result.

DCI Do you have any indication how the crisis affected the demand for traditional trade instruments such as letters of credit?

O'Brien It is interesting that in the immediate aftermath of the crisis, the number of transactions actually declined, which was the consequence of the trade collapse. But after we experienced some recovery, there has been some expansion in the availability of credit lines in trade finance. Even though it is still tight, many exporters are moving back to traditional trade instruments. When I say this, I want to qualify it, as the market is moving predominantly to standby letters of credit and guarantees, because if the exporter and importer have an ongoing relationship, they are not so worried about document proofing. But they still have the financial risks, so there has been a dramatic increase in their use of the standby letters of credit and guarantees.

DCI Is that for security reasons?

O'Brien It's because everyone is nervous about the possibility of default. But going fast forward to our current Survey, while we have not yet analyzed it in detail, this remains a worrying trend. SWIFT messaging for the traditional letters of credit appears to be in decline again. But on the other hand, we are seeing an increase in demand guarantees and standbys.

DCI What about open account?

O'Brien Everyone would like to move to open account. But open account basically means shipping goods directly to a buyer, sending the related documents directly to the buyer and then taking the risk that the buyer will pay on the contract due date for payment or that he will not be able to pay. So, when people talk about the rush to open account, they must never lose sight of the risks.

DCI Did the Surveys show that the crisis had a substantial impact on the number of refusals of documents due to supposed or spurious discrepancies?

O'Brien In our Surveys, it has been pretty consistent that by and large people are reporting an increase in refusals, an increase in discrepancies and a number of issues and problems with court injunctions. If a bank wants to get out of an obligation to pay, the easiest way to do it is to find a document non-compliant and refuse it. That is why there has been an increase in reported discrepancies. Of course, fear also plays a part. Fear creates paranoia, and people become more careful and sometimes they are more inclined to find discrepancies. In our Surveys, some of the respondents report that they are experiencing extreme pressure from customers to refuse documents. That should never happen.

DCI The Survey also found that banks' default risk on trade transactions was remarkably low. Why has this been the case?

O'Brien One reason why trade is low-risk is that the trade cycle for most trade finance transactions is short. That makes a difference. Transactions generally start and finish in less than six months.

Second, if you have goods moving on a continuous trade cycle and there's a continuing demand for the goods, the chances of a party's not being able to pay are much less than in any other form of commercial lending.

A third reason is that banks can, in some cases, actually take control of the goods and, if there is a problem, they can dispose of them.

DCI Since the first Survey, have trade finance flows been re-established to the level they were before 2008?

O'Brien Trade has increased and is increasing but not like before. Banks are still cautious and, given the problems we have in Europe in particular, liquidity is really tight. Now, we are even seeing the emerging countries slow down a little bit. That is also a worrying trend going forward.

DCI Do the Surveys show increasing concern from banks about the Basel III regulations, particularly the one that would require an increase in the credit conversion factor (CCF) for trade finance transactions to 100% from 20%? Are banks informed about what this might mean to them?

O'Brien Banks are generally well-informed. If the Basel III regulations go forward as currently anticipated, there will be a significant and I would say a dramatic increase in the requirement of capital to fund the same level of business.

Trade finance is comfortable for banks, but it is also labour-intensive. If banks have to allocate more capital, the regulations could have a considerable negative impact on the market, as only those who already have high levels of capital and efficiency will remain in business. The developing countries and small- and medium-sized enterprises in those countries would feel the most pain, because banks will choose the best risk and the best clients, and the SMEs will be left in a very difficult position.

DCI This is the fourth year of the Survey. What are its ambitions for the future?

O'Brien The Survey has brought together key players in trade and finance that have not been communicating before. That is the group we have now in the Market Intelligence Group.

Another key benefit of our work is that the models that have been developed by the development banks have expanded significantly since the financial crisis. They "The Survey has brought together key players in trade and finance" have been very successful with virtually no losses reported to date. So, we are looking at possibly expanding that model so more trade can be underwritten in a secure manner.

Third, with the lack of capacity in the market, there is more demand for risk sharing between banks, commercial and development banks and credit insurers. We are going to initiate a project to try to standardize risk-sharing documentation, which should facilitate taking on more risks and supporting more trade as we go forward.

Vincent O'Brien is Chair of the ICC Market Intelligence Working Group and Trade Finance Advisor, China Systems. His e-mail is vob@ebsi.ie

To order copies of ICC Global Surveys on Trade Finance, go to www.iccbooks.com