A report by International Chamber of Commerce (ICC) has concluded that
the latest international banking regulations named Basel III would have "a
profound impact on trade finance."
The
report captioned ‘Global Risks Trade Finance 2013' has, however, reinforced the
belief that trade finance transactions suffer a lower default than the average
likelihood of default by corporate borrowers.
The
phased implementation of Basel III in different countries started in January
2013. These regulations designed to strengthen the global banking system, were
unveiled by the Basel Committee on Banking Supervision (BCBS) in December 2010
under the aegis of the Bank for International Settlements.
Analyzing the impact of BASEL III regulations, the report observes:
"Increases in the overall amount and quality of capital will lead to higher
capital requirements across the board, both for trade finance and other types of
lending. Higher levels of capital will also be required for those transactions
where there is a bank counterparty, such as confirmed L/Cs (letter of credit).
Finally, the cap on leverage will set a floor for the capital requirements of
short-term off balance sheet products like L/Cs."
As
for the liquidity requirement of banks under the emerging regulations, it says:
"The proposed liquidity management and supervision framework will likely
lead to higher funding costs for trade finance products. This is due to the need
to hold high quality liquid assets as a buffer against draw downs on facilities
and to fund short-term lending to small and medium-sized enterprises (SMEs) and
corporates with some proportion of long-term funding, which is typically more
expensive. The latest adjustment to the liquidity rules as of 7 January 2013
includes some preferential treatment for trade finance
instruments."
According to an ICC release, "Based on data from ICC's Trade Register
, a comprehensive online database of over 15 million transactions provided by 21
banks, the new report shows that trade finance is a relatively low-risk asset
class that should not be feared by financial institutions, nor overregulate by
governments."
Trade
finance is critical for supporting global trade flows, which totalled around
US$18 trillion in 2011. It encompasses a wide range of products and services
that help reduce the risks of cross-border transactions.
The
report was released on 16 th April at a major gathering of banking industry
representatives taking place in Lisbon from April 15-19, hosted by the ICC
Banking Commission – the world's essential rule-making body for the banking
industry.
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