Trade Finance Can Burnish Banks' Reputation

Banking needs positive stories to balance the all-too-familiar scandals that have no doubt sapped the morale of both financiers and the businesses relying on them. So we should talk more about the work that trade finance undertakes to foster growth in both developed and developing economies.

Trade finance relies on self-liquidating financial structures, so the credit risk is far below that of straight corporate lending. It also helps suppliers leverage the better credit ratings of their perhaps much larger purchasers—making funding available to entities that would otherwise struggle to find working capital for growth. And trade finance involves the production and movement of tangible goods, which creates jobs and wealth in both purchaser and supplier countries.

Indeed, trade finance can help developing countries build sophisticated economies by fostering investment and undermining corruption. In even some of the least creditworthy countries, trade financiers can provide a structured solution, using tried and tested instruments that are transparent, understandable and affordable. All of this benefits the global economy and humanity as a whole.

Yet trade finance is under pressure from regulations such as Basel III that may hinder trade and therefore harm global growth. The pressures are understandable, given the postcrisis need for tighter banking regulation. Unfortunately, while regulations such as Basel III are needed in banking as a whole, they may unleash unintended consequences such as a potential reduction in the availability of trade finance. Particularly hit will be small and midsize businesses—the very engines of growth, especially in emerging markets.

That said, industry groups are making progress in helping to produce well-targeted regulations, especially with respect to leverage ratios and the rules' treatment of export credits and contingent funding liabilities.

Anti-laundering legislation is another area of potential concern. Here, the industry needs to be more precise in our communications with regulators. We can help them avoid those unintended consequences, particularly in terms of potentially reducing available finance for SMEs.

In fact, a shortfall in available trade finance was recorded in the International Chamber of Commerce's 2014 Trade Finance Survey. Here, liquidity is not the problem: the world is awash with liquidity. The challenge has been in marrying the available liquidity with the available opportunities. Anti-money-laundering constraints on banks could raise the costs of entering into new relationships, resulting in banks becoming perhaps too cautious when evaluating new countries and counterparties.

Empirical data generated by the ICC's Banking Commission can help address these issues. For example, the 2014 ICC Trade Register proved what trade financiers always knew: that the discipline remains very low risk, with default rates averaging between 0.03% and 0.24%, depending on the instrument. That said, the industry's understanding of these benefits is no longer enough. We must ensure the good news is communicated to customers, investors and to regulatory bodies.

Challenges in trade finance also bring opportunities. The market has provided a solution to the issue of banking constraints in the form of alternative financiers. While the sector must develop its own regulatory framework, I personally welcome new players. The more new or alternative financiers that enter the market, the more companies will win financing and the more the global economy is likely to grow. After all, innovation in financing benefits the overall system and makes the market more interesting for all players.

The positive overall contribution of trade finance needs to be made clear. Otherwise, we remain in danger of being caught by the unintended consequences of well-intended initiatives. I intend to dedicate my time as the ICC Banking Commission chairman to communicating these messages—not least because doing so will enhance the reputation of banking overall.

Daniel Schmand is chairman of the International Chamber of Commerce Banking Commission.