Regulatory Road Map to 2020

The leading and trusted authority for banking and trade finance

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ICC BANKING COMMISSION

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Source: WTO

Geographical split, world trade exports (2011, WTO)

a F igures fo r 2012 and 2013 are pro jec tions .S ource: WTO S ec retariat.

50

100

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1990

1991

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2004

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2009

2010

2011

2012P

2013P

Export volume

Forecast

Trend (1990-‐2008)

Source: WTO

Volume of world merchandise exports 1990-2013 (Index, 1990=100)

Trade will continue to grow!

0 10 20 30 40 50 60 70 80 90

100

1950 1960 1970 1980 1990 2000 2010 2020

OA

LC

USD 2 trillion

USD 12 trillion

USD 33 trillion USD 6

trillion

Global trade is expected to reach

USD 48.5 trillion by 2025

Source:World Bank, Ecobank Research

Short term finance is the critical lubricant for trade and the real economy (80%+ of trade flows require financing at least at one point along the chain):

Source: WTO

A few constraints on trade finance and working capital:

KYC/AML Requirements A growing constraint is the cost of compliance, particularly with new regulations relating to Know Your Client (KYC) and Anti-Money Laundering (AML) legislation, with the result that major international banks will not consider deals worth less than US$10m-20m.

Basel Requirements Higher capital requirements will inevitably limit banks’ ability to provide short term financing and reduce the availability of trade finance. Trade finance should not be included under Basel, given its short-term, self-liquidating and unleveraged nature and the extraordinarily low levels of trade finance default.

Deleveraging, US liquidity The retreat of European banks has been caused by regulatory-induced deleveraging and the availability of US funding when most trade finance transactions are conducted in USD (+80% of L/C business is done in USD).

Lack of expertise As banks deleverage (usually by selling their most liquid trade portfolios first) and consolidate, expertise becomes restricted and sometimes lost in the process.

COMPOUNDING EFFECTS OF REGULATIONS

ICC and the Basel issue: Ø Give regulators historical metrics to facilitate drafting and

implementation of the Basel framework

Ø Help policy makers assess the impact of regulations on global trade

Ø Supply the industry with a reliable benchmarks on products to bridge the information gap in trade finance

THE ICC TRADE REGISTER & BASEL

Ø  First ever quantitative analysis of Trade Finance (2009-11)

Ø  Export Finance characteristics added in 2012

Ø  Partnership with wide pool of participant banks (+25 today)

Ø  Establishment of representative data set (+15M trans.)

Ø  Focus on description of key (risk-related) characteristics

THE ICC TRADE REGISTER


ST Trade Finance

•  Import LCs •  Export confirmed LCs •  Standbys and guarantees •  Import loans – corporate risk •  Import loans – bank risk •  Export loans – corporate risk •  Export loans – bank risk

MLT Export Finance •  ECA supported loans •  Asset class, including

sovereign & corporate •  Specialized products,

including shipping, aviation, project finance

•  Amount recovered from any ECA coverage

11.4M (60-70% traditional TF or US2.5t)

Defaults <3,000

Average tenor 90

Number transactions


Average recovery rate on written off products 59.7%

Variance Around average

Loss rates Low (even when stress to counterparties is arguably greatest - 445 defaults on 2.8M T in 2008-09)


Medium – Long Term Export Finance

ICC provided overwhelming evidence that ST TF instruments present a low level of credit risk through the cycle

1.  Low default rates as compared to other forms of short-term lending 2.  Low exposure at default and short economic maturity 3.  Low levels of loss given default 4.  High recovery rates and therefore low write-downs 5.  Low rate of credit conversion from contingent to on-balance sheet exposure

MLT EF instruments seem comparatively low risk, too (Low default rates as compared to other forms of mid-to-long term lending; Recovery rates are relatively high)

Summary

Ø  ICC called to soften the impact of a number of aspects of Basel III on trade

finance has achieved success in a few areas: 1.  Exemption of LC from the one‐year maturity floor 2.  Reduction of the capital charge levied against trade loans to countries with low

sovereign debt ratings 3.  Relatively favourable new guidelines on liquidity

Ø  However, further carve‐outs on leverage (CCF) for TF instruments to be obtained (but difficult, given the desire of BCBS to maintain the integrity of the regulations as a whole).

Ø  ICC is concerned that Basel III will not be implemented at a global level as

intended by the G20 and BCBS, in terms of both content and timing

Ø  CRD IV has a less punitive treatment of off balance sheet items: 1.  Low risk assets would be subject to a 20% CCF for the calculation of the leverage

ratio. 2.  waiver on the 1 year maturity floor had been extended to all trade finance

instruments, not only LCs

Way forward


Unintended consequences?

TRADE FINANCE GAPS

TRADE FINANCE GAPS

Ø  Total gap: 55–68 percent of formal SMEs (13.8–20.4 million) in developing economies are unserved or underserved

Ø  Total value gap in credit financing of formal SMEs is $1.5–1.8 trillion, including high-income OECD countries


The share of trade loans to total loans is very limited in some emerging countries.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Other Loans & Advances Households Trade Loans

Conclusions

-1-

ICC is bridging the information gap and created a better understanding on how work trade

finance and export finance.

- 2 -

ICC Register provided overwhelming evidence that trade finance is a relatively low-risk asset

class.

- 3 -

The ICC policy analysis provided a valuable

leverage to engage into productive discussion with the regulators and policy makers

Thank you!

ICC Banking Commission

The leading and trusted authority for trade finance

Thierry Senechal, [email protected]

Regulatory Road Map to 2020

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