The International Chamber of Commerce (ICC) Banking Commission has found that trade finance was a lower risk banking asset class than corporate or SME lending in 2017.
Its Risks in Trade Finance 2017 report revealed the low-risk nature of transactions that support global trade and said trade finance products continue to present banks with low levels of credit risk compared to other asset class lending.
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The ICC has a trade register which contains 40,000 transactions and a data set of over $670bn of exposures in export finance, across from 2007–2016.
It said this dataset allowed it to conduct analysis on the probability of default, loss given default and therefore allowed it to calculate expected loss in the asset class, which remained lower for banks than lending to SMEs or corporates directly.
It also highlighted export finance as lower risk, attractive under the Basel III changes, because most transactions are covered by export credit agencies at approximately 95% of their value, which minimises the sum a bank may need to pay out directly.
SMEs are the most underserved segment of the market in trade finance, which the ICC said was a relatively low-risk form of finance.
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By GlobalData“Given the continuation of regulatory modelling required under the Basel III final rules, the Trade Register remains a relevant and important tool for banks,” said Krishnan Ramadurai, the new Chair of the ICC Trade Register Project.
