The International Chamber of Commerce (ICC) Banking Commission has released its 2015 trade register, which the global business organisation says again illustrates the favourable risk profile of trade finance.
The register, in its fifth year includes 13m transactions from 2007-14, and encompasses a total exposure of over US$7.6 trillion. It shows that short term (ST) trade finance has default rates that only reach, on average, one fifth of comparable Moody’s default rates.
The Moody’s default rate across 2008-14 for investment grade ratings was 0.11%. By comparison, the 2015 trade register shows that the exposure weighted default rate for export letters of credit (LCs) was 0.02% over the same period, and the transaction default rate for export LCs was only 0.01%. Even the default rate for ST loans for import/export, the highest across any of the products, was no more than 0.06%.
The latest register also suggests that medium- to long-term (MLT) trade finance is low-risk, with the default rate for MLT transactions less than 50% of that of comparable Moody’s corporate credit portfolio. The Export Credit Agency (ECA) coverage that backs MLT products further contributes to their low risk, said the ICC.
“The 2015 trade register clearly demonstrates the low risk nature of trade finance,” said Alexander R. Malaket, deputy head of the executive committee, ICC Banking Commission. “What’s more, [it] also highlights the strong recovery rates for trade finance – with the median result for ST and MLT (through the support of ECAs) trade finance included in the register close to 100% recovery for all products.”
“Year on year the trade register improves its data sample and observes more transactions – making this the most comprehensive, and perhaps the most significant, to date,” said Daniel Schmand, chair of the ICC Banking Commission. “Additionally, the increased alignment with Basel methodology will play a key role in underpinning fact-based dialogue with industry stakeholders and regulatory authorities.”
The ICC adds that political risks and associated sanctions can significantly affect default rates for MLT products. Where transactions related to the Ukraine, Kazakhstan and Iran were excluded from the overall sample, the overall transaction default rate from 2007-14 fell from 0.71% to 0.46% for all transactions, and from 1.43% to 0.17% for financial institutions.
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