* Basel rules eased for derivatives, not trade finance
* Default database presents results of pilot
By Jonathan Lynn
GENEVA, Aug 13 (Reuters) - 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
several say they still have their work cut out to convince
regulators that the $10 trillion 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, told Reuters.
Banks fear the proposed new rules, known as Basel III, will
hit trade finance particularly hard, hurting the 80-90 percent
of the $12-13 trillion 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 20 percent of their value as at
present would make them much less profitable for the banks.
Major players in trade finance include Deutsche Bank
(DBKGn.DE), Royal Bank of Scotland (RBS.L) and Citibank (C.N).
CAUGHT IN THE NET
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.
"It's more that letters of credit are caught in the net of
trying to sweep up everything that is off balance sheet with the
leverage ratio rather than something specifically against us,"
said one trade finance expert.
Many people interviewed did not want to be quoted by name
for fear of appearing to lobby the regulators too aggressively.
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 carve-outs and exceptions.
Trade finance is a low-risk, low-remuneration business, and
if profitability falls, the bankers who provide it will have a
harder time arguing for funds in their banks' credit committees.
After slumping in late 2008/early 2009, flows of trade
finance have largely returned to pre-crisis levels, helped by a
$250 billion package from international institutions agreed at
the G20 summit in London in April last year.
But exporters in some countries in Africa, Eastern Europe
and Central Asia, and some small businesses even in rich
countries, are still finding it hard to access funds.
They could be locked out altogether if the market contracts
again -- unless better capitalised banks in emerging economies
spot an opportunity for business as trade rebounds generally.
"Any increase in the cost of financing will eventually be
passed on to exporters, which means developing countries," said
one trade finance lawyer.
The World Trade Organization, which does not want to be seen
as a lobbyist for banks, is not commenting on the latest drafts.
But WTO Director-General Pascal Lamy, fearing renewed
disruption to trade finance could derail this year's recovery in
trade, brought regulators and trade finance bankers together in
May.
The International Chamber of Commerce, which sets trade
finance standards, met regulators in Frankfurt in early June.
The chamber is now managing a project to pool data from
trade finance banks from 2005 to 2009 to demonstrate just how
safe trade finance is. It has just sent results from a pilot
with a small number of banks to regulators.
The data look at the rates of default in particular trade
finance products, and recovery rates for banks in defaults. It
will also examine specific factors in trade products that may
reduce the likelihood of a transaction resulting in a default.
Watch Documentary Online
* Default database presents results of pilot
By Jonathan Lynn
GENEVA, Aug 13 (Reuters) - 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
several say they still have their work cut out to convince
regulators that the $10 trillion 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, told Reuters.
Banks fear the proposed new rules, known as Basel III, will
hit trade finance particularly hard, hurting the 80-90 percent
of the $12-13 trillion 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 20 percent of their value as at
present would make them much less profitable for the banks.
Major players in trade finance include Deutsche Bank
(DBKGn.DE), Royal Bank of Scotland (RBS.L) and Citibank (C.N).
CAUGHT IN THE NET
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.
"It's more that letters of credit are caught in the net of
trying to sweep up everything that is off balance sheet with the
leverage ratio rather than something specifically against us,"
said one trade finance expert.
Many people interviewed did not want to be quoted by name
for fear of appearing to lobby the regulators too aggressively.
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 carve-outs and exceptions.
Trade finance is a low-risk, low-remuneration business, and
if profitability falls, the bankers who provide it will have a
harder time arguing for funds in their banks' credit committees.
After slumping in late 2008/early 2009, flows of trade
finance have largely returned to pre-crisis levels, helped by a
$250 billion package from international institutions agreed at
the G20 summit in London in April last year.
But exporters in some countries in Africa, Eastern Europe
and Central Asia, and some small businesses even in rich
countries, are still finding it hard to access funds.
They could be locked out altogether if the market contracts
again -- unless better capitalised banks in emerging economies
spot an opportunity for business as trade rebounds generally.
"Any increase in the cost of financing will eventually be
passed on to exporters, which means developing countries," said
one trade finance lawyer.
The World Trade Organization, which does not want to be seen
as a lobbyist for banks, is not commenting on the latest drafts.
But WTO Director-General Pascal Lamy, fearing renewed
disruption to trade finance could derail this year's recovery in
trade, brought regulators and trade finance bankers together in
May.
The International Chamber of Commerce, which sets trade
finance standards, met regulators in Frankfurt in early June.
The chamber is now managing a project to pool data from
trade finance banks from 2005 to 2009 to demonstrate just how
safe trade finance is. It has just sent results from a pilot
with a small number of banks to regulators.
The data look at the rates of default in particular trade
finance products, and recovery rates for banks in defaults. It
will also examine specific factors in trade products that may
reduce the likelihood of a transaction resulting in a default.
Watch Documentary Online
