October 25, 2011 8:03 pm

Basel to change trade finance reforms

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Global banking regulators have agreed to tweak the way the new “Basel III” capital requirements are calculated for trade finance to help low income countries, but rejected industry calls for a full rewrite.

Trade groups and big trade finance providers such as HSBC and Standard Chartered have warned for months that the Basel III reform package could stifle international commerce by sharply increasing the cost of letters of credit, import financing and other trade loans.

The Basel Committee on Banking Supervision, after pressure from the World Trade Organisation, agreed to make two changes to the way banks measure the riskiness of loans to importers and exporters. Both have the effect of reducing capital charges for trade finance, particularly to low income countries.

But the Basel committee, which sets global rules that national regulators then apply, flatly rejected the industry’s broader request, that trade finance be partly or fully exempted from the so-called leverage ratio, which will cap banks’ total assets at 33-times their equity capital.

People familiar with the process said committee members feared that granting exemptions to trade finance would simply open the door to more special pleading and undermine the purpose of the leverage ratio.

That ratio is supposed to be an easy to calculate backstop designed to prevent banks from using improper risk adjustments to flatter their main capital ratios.

Trade finance lending has been shrinking in recent months, as worldwide economic growth faltered and capital-strapped banks raised prices in preparation for the Basel III rules. Total lending hit $114bn in the first nine months, down 6 per cent year-on-year, according to Dealogic.

One Basel committee change cuts the minimum risk weighting – and therefore the capital charge – for trade loans to businesses in countries where the sovereign debt carries low credit ratings or is not rated at all. Thirty-two of the world’s 40 poorest countries do not have credit ratings, the committee said.

The other focuses on trade loans lasting less than a year, sharply reducing their risk-adjusted capital charge. That change will affect all international commerce, but poorer countries are proportionally more dependent on trade finance than richer ones.

Robert Zoellick, World Bank president, and Pascal Lamy, WTO director-general, hailed the revisions as “a useful step that will help promote trade with low income countries”.

But the International Chamber of Commerce said the changes do “not go nearly far enough ... By not treating trade finance as a unique asset class, Basel III actually puts the banking system at more risk.”

The ICC will release statistics on Wednesday showing that 11m trade finance transactions – representing more than $2,000bn in trade – during the past five years led to only 3,000 defaults. Based on this data, they plan to lobby the Basel committee again.

“We trust the Basel Committee ... will take further measures to support trade and job creation by treating trade finance appropriately ... [otherwise] Basel III will hit at the world’s ability to create jobs through trade,” said Kah Chye Tan, chairman of the ICC’s banking commission.

The revisions also do not address complaints from Swiss-based commodities trading houses, which dominate raw materials markets, that the Basel III rules will make letters of credit far more expensive.

“Overall, the proposed changes will not remove the impact of Basel III on trade finance which will still lead to higher capital and funding costs,” said Charlie Beach, a director in PwC’s risk and capital practice.

But several bankers said they were not surprised by the announcement. Regulators have stood firm against making the leverage ratio more complicated.

The changes “are a positive development. It is going to make a difference,” said one banker in trade finance. “We didn’t get the leverage ratio, but I was not expecting it.”

Additional reporting by Javier Blas in London and Alan Beattie in Washington

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