Trust Me, I’m a Banker – Post 2

Banks Lack Transparency in defining Trade Finance Defaults 


Yesterday, we looked at how two banks differ in their definition of trade finance related write-offs.  Below is the data used to show investors from 2007-2012 historical losses in trade finance.

Table Showing Santander Trade Write-Offs 2007-2012

Citi Santander trade write offs2

So the first conclusion is that banks differ in their definition of write-offs when it comes to trade finance assets.  Basically, a bank sets its own definition about what is a default.   There is not one defined event.  Is that what happens in the bond world? Is that what happens with credit insurance?  No, there are defined contractual events that define a default.  For bonds, it’s a missed payment.  For credit insurance, the details are contained in the contract and they typically have 120 days to evaluate.

Why This Matters to Investors?

While TradeMaps may not be a bad investment (not for me to determine, but pension funds, insurance companies, etc. must make that assessment based on their risk reward parameters) the reality is they are trusting the banks and the banks can say what is bad and contractually, they cannot do anything about it.

In the TradeMaps example, neither bank wants to give up control of describing when they can collect money from an investor.

When banks set up a reference portfolio for the initial portfolio (in TradeMaps case $1 billion) it represents developed and emerging market risks.  Because of the short term nature of these trade assets, both Citibank and Santander need to replenish the assets on a fairly regular basis to replicate the original reference portfolio.  Typically, the portfolio will replicate on a day-to-day business.

From an industry perspective, Banks have been providing trade loss data to the ICC Trade Loss Registry for years.  It is interesting to note that the ICC Global Survey was triggered by a request from the WTO to set up a “’loss database’ which could track the default history for the whole trade finance industry.”  It started as a lobby tool (Asian Development Bank, etc) and still is a lobby tool.   But the reality is as seen by the evidence above, every bank defines write offs differently.  There is no transparency or clarity on how banks define trade defaults.

This is a major problem if we are to move to more of an investor world for trade finance assets.  We could do with more standardization across regulator bodies.  If the ICC wants the loss data to be useful beyond banks then perhaps they can help the banks define standards across jurisdiction.

Regulators, are you listening?

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