Consultation on new global capital requirements for banks has closed, provoking a backlash among some banks and industry bodies that the new rules could cost jobs, impede economic growth and have a detrimental effect on trade finance markets.
The new regulations were proposed by the Basel Committee on Banking Supervision last December in two consultative papers tackling liquidity and capital levels in the banking system.
The proposals, which have become known as Basel III, will require banks to raise the amount and the quality of capital they hold before the end of 2012. The aim of such measures is to fulfil pledges made by the G-20 countries that governments will not be called upon again to bail out failing banks with taxpayers’ money.
Levels of required capital, liquidity and leverage ratios will be set by the end of the year.
There have already been calls from French banks for a new round of talks on Basel III proposals, as well as questions raised about the reality of banks hitting the 2012 deadline.
A letter from the French Banking Federation sent to the Basel Committee on April 16, commented that “excessive capital and liquidity requirements would bring the economic recovery to a screeching halt”.
There have also been concerns about the implications of Basel II and now Basel III on trade finance.
Trade finance industry body BAFT-IFSA has also submitted letters to the Basel Committee commenting that suggested regulations will cause further uncertainty among banks on how to apply Basel II to trade finance activities.
“Trade finance instruments have historically maintained a low risk profile in comparison with other financial instruments. We are concerned that the consultative document does not account for their intrinsically safe structure,” says Donna Alexander, chief executive officer of BAFT-IFSA.
“We wish to ensure that unintended consequences are avoided, and any changes ultimately adopted do not result in reduced trade flows for trade-focused banks at a time when they are essential to continued economic recovery around the globe.”
As an example of BAFT-IFSA’s concerns, according to the Basel committee’s consultative paper on strengthening banks’ capital requirements, off-balance sheet items are deemed sources of “potentially significant leverage”. Trade instruments such as letters of credit and standby letters of credit are included in this category.
The Basel Committee has proposed to implement an increased leverage ratio constraint on these off-balance sheet items by increasing the credit conversion factor (CCF) used to 100%.
BAFT-IFSA believes this move unfairly penalises trade finance assets which are far more secure and safe than other off-balance sheet items. Such measures, the group argues, could see banks slowing down their trade-related off-balance sheet business or end up passing on the cost to their clients, both of which would be detrimental to economic growth.
BAFT-IFSA comments: “The inclusion of trade in the generic description of OBS [off-balance sheet] items is misleading given the way the products are used to support genuine underlying commercial trade transactions. As a general policy, banks do not enter into ‘synthetic’ trade transactions, where off-balance sheet trade structures could potentially be used to disguise on-balance sheet loans.”
The group argues that trade finance products do not contribute to excessive leverage as they are tied to client transactions, nor do they contribute to a downward pressure on asset prices as they are short-term and self-liquidating financing tools.
BAFT-IFSA proposes for a 20% CCF rate to be applied to trade items, as an increase to 100% will ultimately encourage banks to divert capital to other products instead.
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