Coastline newsletter / 2010 edition

ISSUE 33 Jun2010

ICC Banking Commission Global Survey – Rethinking Trade Finance 2010

By Gary Collyer

On 23 April, the latest ICC Global Survey was simultaneously released in Beijing (the intended venue for the Spring 2010 ICC Banking Commission meeting) and Paris. The Survey Report received widespread coverage in the media including the Financial Times, Reuters and the Wall Street Journal.
The 2010 Survey is the result of cooperation between ICC and a range of international organizations including the World Trade Organization (WTO), The World Bank, the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the Berne Union and the leading Development Banks (EBRD, IFC, ADB, IADB).

The Survey received feedback from 161 banks located in 75 countries - a 32% increase in the response rate on last year's Survey.

To view the full Report from the ICC Survey, entitled 'Rethinking Trade Finance 2010', please click here.

The Survey questions targeted trends occurring in trade finance operations of banks in 2009 and specifically addressed the following topics:

  • Breakdown of traditional trade finance products handled within banks
  • Trends in volumes of traditional trade products
  • Trends in demand and pricing for bank undertakings and L/C confirmations
  • Operational impact of the credit crisis
  • Trade credit line availability
  • Loss experience for rating traditional trade products versus general banking facilities

As noted in the foreword by ICC Chairman Victor K. Fung, the 2010 survey "should be useful both to business and policymakers as they consider ways to enhance support for international trade and to restore vigorous economic growth."

A few points of interest to note as you read the Survey…

Facility lines still seem to be under pressure with 42% of respondents indicating a decrease - from 2008 levels - for FI credit lines and a 40% decrease for corporate credit lines. This is despite 73% of respondents indicating an increase in requests for confirmation of letters of credit.

Refusals and injunctions are still on the increase. Around 34% of respondents indicated an increase in the number of refusals in 2009, with 71% indicating an increase the dubious/spurious discrepancy category. 23% of respondents (up from 12% in 2008) indicated seeing an increase in the number of court injunctions that have been issued.

Of the 161 banks that responded to the Survey, 89% indicated that their losses in respect of traditional trade finance products were slightly, moderately or significantly less than that for general banking facilities.

SWIFT provided some extremely useful trade traffic data for 2009. For example, between 2008 and 2009 there were some 4 million less trade messages sent (MT4 and MT7 messages) - 42m sent in 2009.

Although, in 2009, the MT700 represented 15% of the total MT7 messages sent, the MT734 (refusal message) accounted for only 3.98%. This may demonstrate that a number of banks are still using the MT799 for their refusals rather than the structured MT734. For 2009, the SWIFT data shows that the MT4 messages are fairly flat when reviewed for the whole year, whereas the monthly statistics for MT7 messages show an increase from a low of around 3m messages in February 2009 to a high of 3.8m in December.

The Survey also includes extracts from the ICC Banking Commission response to the Basel Committee Consultative Document on "Strengthening the Resilience of the Banking System:  "Without commenting on the appropriateness of a new mechanism to limit bank leverage, we have been concerned to note, however, that the proposals group trade products with a number of other instruments which exhibit significantly different characteristics – effectively categorising some trade products (such as letters of credit) as "risky" asset classes." and "It is our contention that this approach is unjustified; and, moreover, is liable to lead to an overall reduction in the supply of trade finance."

The proposals being considered to reform the Basel II framework would increase the Credit Conversion Factor (CCF) for all off-balance sheet exposures, including trade products, to 100% when calculating a leverage ratio constraint. This compares with just 20% for trade-related contingencies and 50% for transaction related contingencies under the current Basel II framework.

"We consider that this blanket approach to "off-balance sheet" items under the proposed leverage ratio, is based on a fundamental misunderstanding of both the operational context and the mechanics of trade financing,” the Survey went on to comment.

The Survey also contains expert commentaries from the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), Asian Development Bank (ADB), Inter-American Development Bank (IDB) and Berne Union.

To view the full report 'Rethinking Trade Finance in 2010', please click here

Another recent paper that maybe be of interest to you is the ICC response to the Basel Committee Consultative Document on "Strengthening the Resilience of the Banking System". To view this document, please click here

And finally, a free webinar that I conducted for Coastline Solutions as part of the BAFT-IFSA learning series, entitled Trade Update 2010, is available to you at the following address:

DC-PRO is a fully searchable online reference library of Documentary Credits information containing all necessary information on Letters of Credit and related Trade Finance matters.

For full information on DC-PRO and for a free evaluation of the service, please CLICK HERE


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