Trade finance banks say Basel III will damage world trade
International business will become significantly more expensive if the impending Basel III regime does not make allowances for trade finance, bankers fear.
Major trade finance providers such as HSBC and Standard Chartered are lobbying to secure less stringent capital rules and specific provisions for trade finance.
“We’re active in talking to all the relevant parties,” says Alan Keir, group general manager and global co-head of HSBC’s commercial banking division. “We believe it’s important to encourage international trade; we believe that letters of credit and most forms of trade finance are a productive tool underlying economic transactions and that is something that we want to see encouraged and recognised.”
The stringent new capital requirements proposed by the Basel Committee on Banking Supervision – along with new global standards for leverage and liquidity – will increase the amount of capital that banks have to set aside for trade finance, making it a far less attractive business for banks.
This could result in a 2% fall in global trade and a 0.5% drop in global gross domestic product, Standard Chartered’s head of transaction banking, Karen Fawcett, told a banking conference in October.
Under the new rules, banks would be required to hold capital against 100% of a trade finance lending commitment, up from the current prerequisite of 20%.
Tighter liquidity and leverage regulations may also have a negative impact, because planned leverage ratios will not account for the risk profile of a loan – lumping lower risk trade finance deals in with riskier lines of business.
As a result, larger banks may cut back trade finance operations, while smaller banks could be forced out of the market entirely.
Basel III is set to be in place by 2019, but the Basel Committee for Banking Supervision is aware of the issues surrounding trade finance, says Stefan Walter, the committee’s secretary general: “The Basel Committee is assessing the treatment of trade finance with a particular focus on access for low income countries, while at the same time ensuring the integrity of the broader financial stability agenda agreed by the Basel Committee and endorsed by the G20.”
