Breaking: Trade finance default rates rise slightly, 2023 ICC Trade Finance Register

The ICC’s Trade Finance Register has been released, reporting a small increase in default rates across documentary trade and open account products, whilst highlighting still, the low-risk nature of the asset class.

The International Chamber of Commerce (ICC) register, a collaborative project with Boston Consulting Group and Global Credit Data (GCD), stands as a benchmark for trade finance risk assessment, drawing on the expertise of leading global financial institutions. 

Established in 2009 to provide empirical data to the trade and export finance industry, the Register has evolved to cover a wider array of products and more detailed data, reflecting the sector’s credit risk profile and characteristics.

The ICC Trade Register Report 2023, has aggregated the data of 22 member banks data covering documentary trade, open account, and supply chain finance. 

The data aggregates 47 million transactions and exposures exceeding $23 trillion, offering an estimated coverage of 23% of global traditional trade finance flows and 7% of all global trade flows, providing a substantial yet partial perspective of the global market.

Key statistics include an exposure-weighted loss given default rate of 0.10% for import LCs and 0.02% for export LCs, reinforcing trade finance’s reputation as a low-risk area of banking. 

At its inception, the Register began with data contributions from nine international banks, which has since expanded to include a larger number of banks over the years, although the exact number has fluctuated annually.

Rudolf Putz, Head Trade Facilitation Programme (TFP), EBRD told TFG, “We highly welcome this report, which will help us to convince our partner banks in Eastern Europe, the CIS and the Southern and Eastern Mediterranean to finance international trade with documentary credits.

We will continue to organise trade finance training and advisory services which will help our partner banks to further improve customer service and to reduce the risk of misunderstandings and disputes.”

Richard Wulff, Executive Director, ICISA, told TFG, “​​Conditions across the wider trade environment are certainly challenging with economic, political and security pressures being felt widely. 

This makes the ICC’s trade finance registry report so useful as it clearly evidences how those global events impact trade and the sectors which support and facilitate it. 

Their findings are echoed in the trade credit insurance sector, where we see many of the trends identified in 2023, but also that the sector is more than strong enough to respond to these challenges.”

Regulatory context

Recent regulatory changes have significant implications for trade finance, with Basel 3.1 introducing more stringent capital requirements that affect the treatment of trade exposures. 

The EU’s Capital Requirements Regulation (CRR) continues to evolve, reflecting a heightened regulatory focus on the robustness of banks’ capital frameworks. 

These developments make the empirical data provided by the ICC Trade Register even more crucial for banks to ensure compliance and optimise their capital allocation for trade finance.

Andrew Wilson, Global Policy Director, ICC, told TFG, “Recent regulatory proposals in the EU and UK are a clear reminder of the imperative for the market to have robust data on the historical performance of trade assets. 

We remain committed to making the Trade Register the definitive reference point for financial regulators–and, specifically, one that can ensure the appropriate treatment of trade exposures under Basel III.

To get there, we need the full support of the industry–including smaller banks–to deepen and broaden the existing data pool in the Register. 

The launch of this report is a call to action for more banks to step up in contributing data to this essential utility for the future of the trade finance market.”

Wulff added, “The EU has put forward several important measures in recent months aimed at strengthening the competitiveness of businesses. 

I see the ongoing efforts to clarify how credit insurance is used by banks as a relatively simple step for the EU to take to further boost this aim. 

The partnership between banks and insurers is one that delivers billions of euros in funding to businesses across and is done so on the basis of two highly regulated and secure sectors. 

The proposals under Article 506 give the EU the opportunity to secure a competitive advantage at a time when difficult market conditions show the challenges the real economy is exposed to.”

In the United States, the Financial Accounting Standards Board (FASB) has introduced new standards that require companies to disclose their obligations under reverse factoring, or payables finance programs.

Incorporating recent regulatory changes, FASB has mandated new disclosure requirements for reverse factoring programs, also known as payables finance. 

These new standards, which aim to enhance transparency around these arrangements, require organisations to disclose their obligations under these programs, including the terms of the financing arrangements and the nature of the liabilities involved.

The alignment of these regulatory measures with the data-driven insights from the ICC Trade Register underscores the global trend towards more data-centric risk assessment and management in trade finance.

Analysis of default rates by product

In 2022, the combined exposures of documentary trade, open account trade, and supply chain finance payables finance in the Trade Register amounted to approximately $2 trillion, representing about 23% of global traditional trade finance flows and 7% of all global trade flows.

Specifically, documentary trade accounted for $550 billion (22% of trade finance and 2% of global trade), while open account trade and supply chain finance payables finance accounted for $1.44 trillion (23% of trade finance and 5% of global trade).

This year’s Trade Register data from 2022 indicates an increase in default rates across trade finance products compared to 2021, yet these rates are still lower than the 2020 figures, aligning with pre-pandemic trends and suggesting no significant rise in defaults post-COVID-19.

Import LCs

Default rates for import letters of credit (LCs) nearly doubled from 2021 in terms of obligor weighting, and remained flat from an exposure-weighted perspective, with a concentration of high-value defaults in the APAC region and Central & South America.

Export LCs

Export LCs saw default rates double in 2022, with a significant share of defaults linked to Russian bank exposures, indicating a consistent proportion of defaulting obligors, albeit of smaller value.

Loans for import/export

Loans for import/export experienced a twofold increase in default rates in 2022, influenced by macroeconomic uncertainties, such as inflation and energy supply disruptions, and the reduction of government support.

Performance guarantees

Performance guarantees reported increased default rates in 2022 across all measures, yet remained below the levels seen at the onset of the pandemic and in the pre-pandemic year of 2019.

Supply chain finance

The ICC Trade Register’s six-year data on supply chain finance (SCF) payables finance shows a medium-term risk profile, with a post-2020 decline in default rates, indicating resilience during the pandemic. 

In 2022, SCF payables finance maintained its position as the lowest-risk trade finance product on an exposure-weighted basis, attributed to the high credit quality of buyers involved in SCF transactions.

Peter Mulroy, Secretary General of FCI, told TFG, “The trade register’s findings of the very low default rate of supply chain finance is proof that reverse factoring/payables finance is a low-risk service that tremendously benefits all parties including the anchor buyer, their suppliers and the financial intermediary. 

This is again further evidence that invoice finance in general and reverse factoring in particular, when conducted properly continues to show a low loss given default.”

Despite the perception of SCF as a lower-risk product, the sector’s rapid growth and recent market events suggest that these rates merit close observation for potential risk escalation.

The report’s portrayal of default rates offers a perspective on the risk associated with different trade finance products from the viewpoint of larger banks.

However, the absence of data from smaller banks may limit the report’s scope, potentially overlooking the varied risk landscapes these institutions navigate, especially in dealings with SMEs and emerging markets.

The Trade Register’s big data problem

The report’s data, while robust, warrants caution. 

The underrepresentation of smaller banks and the potential variance in transaction nature between large and small institutions suggest that the findings may not fully capture the entire trade finance market.

Currently, the ICC charges banks who have participated and sent their trade data to the register, up to $15k for accessing the full dataset (this would apply to the 22 member banks), and for those who do not wish to send their data, it costs $30k to purchase the analysis.

But it’s probably not a commercial problem.

The insurmountable challenge around getting smaller banks to compile data in a ‘trade register’ ready format will be difficult.

Steven Beck, Head of Trade & Supply Chain Finance, Asian Development Bank (ADB), told TFG, “Looking back when ADB first convened commercial banks and ICC to create the Trade Finance Register – the first publication was called the ICC-ADB Trade Finance Default Register and was released in September 2010 – there’s little question it has been a useful tool to substantiate discussions with regulators, risk management units, and to encourage insurance and other financial institutions to get into trade finance and help close gaps. 

But the market agrees the Register needs to be taken to a new level to remain useful, one that delivers a lot more granularity.”

Rudolf Putz said, “We will check our possibilities of contributing to similar future reports which include also statistics on default rates in smaller and high risk countries in Eastern Europe, the CIS and the Southern and Eastern Mediterranean.”

An alternative business model could be to charge banks relative to their trade finance products turnover, and also to provide data collection support to allow for transaction data to be fed into the register, thus making the results more concrete and representative.

Moreover, the report’s methodology and data collection processes continue to evolve, focusing on enhancing sustainability assessments and incorporating more granular data points for future analyses.

The 2023 ICC Trade Register Report offers a ‘large bank’ snapshot of the trade finance industry, highlighting the low-risk nature of trade finance transactions amidst a complex macroeconomic and geopolitical backdrop.

The report serves as a critical tool for industry stakeholders, though it also underscores the need for broader data inclusivity and methodological advancements to capture the full scope of global trade finance activities.