2013 - ICC India

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60ICC BANKING COMMISSION | 2013 GLOBAL RISKS TRADE FINANCE | APPENDIX BSensitivity of results to discount rate choiceAs noted above, there is a lack of consistency amongst banks globallyon the appropriate discount rate to use when estimating LGD, althoughthere is often a high degree of convergence within specific countriespotentially reflecting national regulatory preferences 129 . Discussions with theparticipating banks also indicated that they use a variety of approaches andlevels. Some of them use differentiated discount rates for different productsor regions, while others use the effective interest rate. With regard to levels,those that reported discount rate figures indicated a range of between 4%and 11%.Given this lack of consensus, while we have used a figure of 9% for theresults above, we have shown the impact of different discount rates, rangingfrom 5% to 13%, in the table below.FIGURE 35Sensitivity of defaulted transaction economic loss to discount rate5% 7% 9% 11% 13%Import L/Cs 38% 40% 42% 44% 46%Export Confirmed L/Cs 65% 67% 68% 69% 70%Loans for Import 61% 62% 64% 65% 66%Loans for Export: Bank risk 71% 72% 73% 73% 74%Loans for Export: Corporaterisk54% 56% 57% 58% 59%Performance Guarantees 85% 85% 85% 86% 86%Overall 54% 56% 57% 59% 60%On those products with high recovery rates, the defaulted transactioneconomic loss is relatively sensitive to the assumed discount rate, increasingby close to 1% for each additional 1% in the discount rate. This sensitivity isto be expected given that we have assumed that recoveries occur eitherafter one or two years and we would also expect the results to be sensitiveto the assumed amount of time required to recover.MaturityUnder the advanced IRB approach, banks are typically expected to estimatethe EM of their exposures as an input to the RWA calculation. This EM iscalculated based on the contractual timing of remaining cash-flows, with afloor for most exposures of one year and a maximum of five years (for RWApurposes) 130 . For non-interest bearing “bullet” products, such as importL/Cs and export confirmed L/Cs, the EM is in fact equal to the remainingmaturity of the transaction.
ICC BANKING COMMISSION | 2013 GLOBAL RISKS TRADE FINANCE | APPENDIX B 61The data in the Trade Register is provided at an aggregated level andhence it is not possible to directly measure the maturity of each of thetransactions. However, we have been able to derive an estimate fromthe data that has been provided, as it contains both the total value oftransactions undertaken in a year and the value of transactions stilloutstanding at the year-end 131 . The ratio of value at year-end to the totalvalue through the year provides a measure of the average maturity of theproducts, subject to certain assumptions, as illustrated in the box below.FIGURE 36Example of estimating average maturity from balance figures■■A bank has 10,000 customers who need to import goods every quarter■■Each customer requires one letter of credit per quarter, starting at the beginning of theperiod, with each L/C having a value of US$500,000■■Ignoring defaults (in order to make the example simpler 132 ), one would have:OPENEDL/CSVALUE OFOPENED L/CSVALUE OFL/CS ATDEFAULTEDL/CS(US$ MILLIONS) PERIOD ENDJanuary-March 10,000 5 5 100April-June 10,000 5 5 99July-September 10,000 5 5 98October-December 10,000 5 5 97Total over year 40,000 20 5 394Under the reporting within the Trade Register, this would appear as:■■■■40,000 L/Cs in the year, with value of US$20 millionAt the end of the year, there will be 10,000 L/Cs in place, with a value of US$5 million■■Dividing the value of transactions at year-end by the total value during the year providesan estimate of the maturity of 0.25 years.■■If however the average maturity was six months, then the figures would beOPENEDL/CSVALUE OFOPENED L/CSVALUE OFL/CS ATDEFAULTEDL/CS(US$ MILLIONS) PERIOD ENDJanuary-March 10,000 5 5 100April-June 10,000 5 10 99July-September 10,000 5 10 98October-December 10,000 5 10 97Total over year 40,000 20 10 394Under the reporting within the Trade Register, this would appear as:■■■■40,000 L/Cs in the year, with value of US$20 millionsAt the end of the year, there will be 10,000 L/Cs in place, with a value of US$10 millions■■Dividing the value of transactions at year-end by the total value during the year providesan estimate of the maturity of 0.5 years.
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