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The Resource for the Global Finance Profession

BAFT-IFSA: Basel III Could Severely Hinder Trade Finance

  • By Andrew Deichler
  • Published: 2011-09-30

The sagging global economy could lose further momentum if new regulations under Basel III take effect, according to the global financial services association for international transaction banking BAFT-IFSA. In particular, certain capital restrictions for banks as mandated by Basel III could greatly harm the funding of trade finance. “Trade finance is the oil to the wheels of commerce,” said Donna K. Alexander, CEO of BAFT-IFSA, in an exclusive interview at Sibos 2011. “If trade finance is made unavailable or unaffordable, you’re not going to have a key component in place for continued global economic recovery.”

BAFT-IFSA, formerly the Bankers’ Association for Finance and Trade and the International Financial Services Association, cited key areas of Basel II and Basel III that could prove problematic for corporates.

Capital 

BAFT-IFSA, in cooperation with other industry groups, proposes that the Basel Committee recommendations change to remove the one-year maturity floor in Basel II and allow banks to apply actual maturity tenor for trade finance exposures, with the minimum one-year tenor only applied in certain circumstances.

The association also proposes a separate Asset Value Correlation (AVC) for trade finance from corporate banking. The Basel Committee’s AVC proposals could increase the cost of trade credit and limit its availability, particularly in emerging markets.

Liquidity 

BAFT-IFSA is concerned that higher liquidity standards in Basel III, coupled with the regulation’s tighter capital standards, could hinder transaction banking. The association is pushing for FI cash balances derived from custody, clearing, settlement and selected cash management to receive a certain run-off factor, and be clearly distinguished from correspondent banking. Additionally, BAFT-IFSA wants correspondent banks to be recognized in the same fashion as their client FIs, in terms of balances. The proposal could create greater synchronization of regulations and less chance for regulatory arbitrage.

Additionally, BAFT-IFSA states that the recognition given to deposits from FIs should be extended to the net stable funding ratio, where currently, cash balances from FIs derived from transaction banking activities do not qualify as an available source of stable funding. The organization insists that they are an available source of stable funding.

The implications of the Basel Committee’s proposals are severe for corporates. “The corporates may have to find an alternative, more risky and expensive source for trade finance,” said Alexander. “I’ve heard economists say that there’s a one-in-three chance of a double dip recession in the United States and a one-in-two chance in Europe. If we’re looking at that type of economic dynamic, we need to ensure that additional regulations are not imposed on a proven low-risk financing vehicle that is one of the key tools supporting global economic recovery.”

According to BAFT-IFSA, if Basel III is implemented as-is, banks may decide to either drop their trade finance services altogether, or raise costs for their corporate clients. “You either get out of it, or you consider increasing costs. If there’s a clear third alternative, I’m not aware of it,” said Alexander.
 

Copyright © 2014 Association for Financial Professionals, Inc.
All rights reserved.

Copyright © 2014 Association for Financial Professionals, Inc. - All rights reserved.
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