The potential impact of Basel III on trade finance has been well documented. Trade letters of credit, as off-balance-sheet items, will be converted into credit items for the purpose of calculating the bank’s capital requirements. The conversion rate will be 100%, so the bank will need to hold capital against the full value of trade finance, even though much of it is secured against commodities or transportation.
This could have particular implications for the merchant trading companies whose business is built on their middle-man status between the producers and consumers of natural resources. And with the vast majority of commodity transactions carried out in dollars, eurozone banks that were leading participants in the market face difficulties maintaining their financing volumes.
