UK banks step up Basel pressure on trade finance

The industry association for British banks has joined those asking banking regulators to revise provisions in new rules of credit affecting trade finance for fear they could disrupt the funding that is the lifeblood of global commerce.

Bankers believe the new Basel III banking rules, intended to forestall a repeat of the 2008 financial crisis, do not take into account that trade finance is one of the safest forms of lending.

In a letter to the Basel Committee on Banking Supervision published on Monday on its website, the British Bankers' Association (BBA) noted the British government and banks had set up a taskforce to look at trade finance and other questions.

"... the taskforce has concluded that customized treatment of trade finance would better reflect the risk profiles of these products and increase the capacity of banks to provide them, which will assist with exports and recovery," said the November 12 letter from BBA Chief Executive Angela Knight.

Leaders of the G20 rich and emerging countries endorsed the new package of regulations at a summit in Seoul last week but also agreed to monitor the impact of Basel III on trade finance.

HSBC Chairman Stephen Green, the former chairman of the BBA, said in Seoul he was confident Basel would be amended.

Low Default Rate

Governments and the World Trade Organization are concerned that companies in developing countries are still unable to access trade finance, vital to keep their exports flowing, and tough capital rules could discourage banks even further.

The Paris-based International Chamber of Commerce, which sets rules for trade finance, recently published the results of a database of trade finance transactions showing a default rate of only 0.02 percent.

The database, funded as a pilot project by the Asian Development Bank, looked at 5.22 million transactions from nine leading banks over five years, worth $2.5 trillion.

In its letter the BBA called on the Basel regulators to use the actual maturity of trade finance deals -- on average 115 days according to the database -- instead of applying the one-year maturity floor used for all loans when prescribing how much capital banks should set aside.

The current rules do allow national regulators to waive the maturity floor, but so far only Britain has done so.

The BBA also urged regulators to use industry data in their treatment of trade finance instruments, which are typically held off balance sheets and rarely convert to on-balance-sheet items. It called for an industry-wide panel of experts to draw on the expertise of the London banking market to calculate the appropriate "conversion factors" for different trade finance instruments.

The letter acknowledged Basel III, which makes it harder for banks to hide toxic assets, aims to improve regulation to build a robust financial system critical for economic recovery.

"However, the broad strokes of how the new capital, leverage and liquidity rules will be applied may have significant unintended consequences on banks' ability to provide these services and financing at affordable costs to business," it said.

[Source: By Jonathan Lynn, Reuters, Geneva, 15Nov10]

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