Banks want different rules for trade financing

MANILA, Philippines - Banks worldwide are asking the Basel committee on banking supervision to soften capital requirements with regards to trade financing.

They argued that current and proposed rules impose capital requirements on trade finance that are disproportionately high considering the safety of such financing.

“These rules force them to lock up funds that could be used to support trade, and discourage them from extending more,” the Asian Development Bank (ADB) said.

Trade finance is needed to grease the wheels of trade, a major source of employment and economic growth. Banks provide the finance for a third of world trade.

ADB head for trade finance Steven Beck said that banks broad support for Basel’s work in tightening capital requirements to make the global financial system more robust.

“However, Basel rules should not treat trade finance the same as other riskier products, otherwise global trade, especially in emerging markets, will suffer. That means slower economic growth and fewer jobs, and makes it harder to achieve Millennium Development Goals on poverty reduction,” Beck added.

The International Chamber of Commerce and the ADB has recently been making representations with the Basel committee for bank supervision.

The two global institutions has teamed up to create the pilot ICC-ADB Register – a compilation of 5.22 million trade transactions from commercial banks – which shows that trade finance carries a relatively low probability of loss, and thus their argument that trade finance should be considered a different asset class from more risky forms of finance.

They plan to transform the ICC-ADB Register a permanent entity that will provide valuable data on trade finance defaults and losses to regulators and commercial banks. 

The Basel committee is a working committee under the Bank for International Settlement (BIS).

The BIS is composed of the world’s central banks, while its Basel committee has been deep in the formulation of guidelines to ensure the financial health of the global banking system following the global financial crisis in 2008.

It has released the Basel I and II frameworks for capital and risk management, and has also released proposals that will embody the Basel III framework.

In 2009, the ADB approved a total of $16.1 billion in financing operations through loans, grants, guarantees, a trade finance facilitation program, equity investments, and technical assistance projects. It mobilized trade co-financing amounting to $3.2 billion.

Early this year, the ADB was involved in a $1-billion loan and guarantee trade finance arrangement with Allied Banking Corp. (Allied Bank), Development Bank of the Philippines (DBP), the Metropoplitan Bank & Trust Co. (Metrobank), the Philippine National Bank (PNB), and Rizal Commercial Banking Corp. (RCBC).

The ICC is the largest, most representative business organization in the world. Its hundreds of thousands of member companies in over 120 countries have interests spanning every sector of private enterprise. 

A world network of national committees keeps the ICC International Secretariat in Paris informed about national and regional business priorities. More than 2,000 experts drawn from ICC’s member companies feed their knowledge and experience into crafting the ICC stance on specific business issues. 

The United Nations, the World Trade Organization, the G20 and many other intergovernmental bodies, both international and regional, are kept in touch with the views of international business through ICC.