Sunday 17 December 2017

Fears new Basel rules will choke $10 trillion trade loan market

Jonathan Lynn

Recent amendments from the Basel Committee on banking regulation do not appear to meet the concern of practitioners of trade finance -- that proposed new rules could make the vital loans scarcer and more expensive.

Bankers and lawyers are still deciphering the revisions, but it is said they still have their work cut out to convince regulators that the $10 trillion (€7.8trn) market, the lifeblood of global trade, is much less risky than other forms of lending.

"From what we can tell so far, on the specific trade issue, I don't see that they've made any change at all," Dan Taylor, president of BAFT-IFSA, an international association representing bankers in trade finance, said.

Banks fear the proposed new rules, known as Basel III, will hit trade finance particularly hard, hurting the 80-90pc of the $12-$13trn in world trade that depends on the loans.

Published in December, the rules would impose a leverage ratio on banks, requiring them to set aside capital equivalent to the value of off-balance-sheet items.

Many banks hid toxic assets off their balance sheets, a cause of the financial crisis when those assets fell in value as markets weakened. The new rules aim to discourage a repeat.

But documentary letters of credit -- the short-term loans collateralised on cargoes that have formed the bulk of trade finance for centuries -- are also held off balance sheets.

A requirement to fully capitalise such loans instead of providing capital at 10 or 20pc of their value as at present would make them much less profitable for the banks. Major players in trade finance include Deutsche Bank,Royal Bank of Scotland, and Citibank.

Revisions to the proposals issued at the end of July after consultations did seem to soften the treatment of derivatives, but not of trade finance, bankers and lawyers said.

Practitioners do not believe the Basel Committee of central bankers and bank supervisors is targeting trade as such.

November's summit of the G20 in Seoul will be largely devoted to the Basel proposals on re-regulation, and there is little appetite now for exceptions.

Irish Independent

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