What is trade finance? How long does a trade finance instrument last? Those are the existential questions banking industry groups want the European Commission to take a stance on, in a push to free up billions in regulatory capital.
In a flurry of submissions to the European Commission, industry associations are asking the body to include a comprehensive definition of trade finance in the Capital Requirements Regulation for the first time. Crucially, the proposed definition would be silent on the question of maturity.
The lobbying is part of a broader drive to end uncertainty over the capital treatment applied to trade finance products that have a maturity of more than one year, which are typically guarantees provided by lenders to large corporate customers.
EU banks issued trade-related guarantees worth €350bn in 2023-24, according to an industry survey, and the products form a large and growing share of the trade finance portfolios of many major lenders.
But performance guarantees, the most widely used form of trade-related guarantees, have an average maturity of around 620 days, according to the International Chamber of Commerce (ICC), defying the common notion of trade finance as a primarily short-term set of products.
Currently, EU rules apply a 20% credit conversion factor (CCF) – which denotes how much capital should be held in reserve for a particular exposure – to trade-related off-balance sheet items. But the regulations define those products as “generally having a maturity of less than one year”.
That has caused a division among banks in the bloc, GTR has previously reported. Most see the “generally” as allowing a 20% CCF for longer-tenor instruments, but acknowledge that regulators could ultimately take a different view. Others, mainly in the Nordic region, have started applying a 50% CCF to trade finance exposures with a maturity of more than one year.
Industry groups have seized on a European Commission consultation on bank competitiveness to push for an updated definition of trade finance that removes any reference to maturity. Such a reform would mirror the approach of UK regulators, which allow guarantees to qualify for a 20% CCF regardless of tenor.
“The maturity criteria is not relevant and discriminatory to assess the underlying risk of such products,” the ICC said in a submission last week.
The Association for Financial Markets in Europe said an approach like the UK’s “would also better reflect market and bank practices and legal provisions for trade finance products which have evolved considerably since the original [Capital Requirements Regulation].”
In place of the existing definition, the ICC asked the European Commission to adopt the following definition of trade finance, which it developed in 2024:
“‘Trade finance’ means a financial service facilitating the real economy, enabling businesses to finance, monetise, risk mitigate and settle trade flows, thus supporting the movement of goods and/or the performance of services regardless of maturity, both internationally and domestically.”
The European Banking Federation, the apex lobbying group for the continent’s lenders, did not include the ICC definition in its submission, but asked the European Commission to remove the reference to trade finance maturity from the legislation.
To woo policymakers, the industry has revived a tactic that several years ago helped banks convince the EU to drop proposed higher capital charges on trade finance: emphasising the potential impact on lending to European companies.
The industry hopes such arguments will have greater purchase at a time when Europe is fretting over the competitiveness of its exports against rivals such as China.
The ICC said the “profitability and competitiveness of European corporates” will be harmed if banks hike prices due to steeper capital costs. “Such misalignment can adversely affect the competitiveness of EU banks and, in turn, weaken the ability of EU corporates to compete effectively in international markets.”
Paris Europlace, an organisation that advocates for Paris as a finance hub, said expunging the maturity caveat and lowering capital treatment for performance and technical guarantees “would improve alignment between regulation and real‑world risk, and would support exporters and strategic sectors”.
While the submissions argue a maturity-neutral tweak will create a level playing field with UK rivals, countries such as the US, Singapore and Australia have closely followed the underlying Basel framework, which stipulates a 20% CCF only for trade instruments with a tenor of less than a year.
US regulators confirmed in March they plan to retain steeper capital treatment of longer-tenor trade finance items, compared to those with a duration of under 12 months.
Call to reverse insurance reform
The industry associations are also using the Commission consultation, which closed on April 19, to call for the reversal of a reform introduced last year that made it less effective for banks to use credit insurance for capital relief.
Under its implementation of the latest tranche of Basel capital reforms, the EU stopped allowing banks to use internal modelling to calculate the capital relief when they take out insurance on their lending. Instead, a flat 45% loss given default (LGD) – which is used to estimate the expected loss to a lender if a borrower defaults – was imposed.
The European Banking Federation claimed the LGD is “excessive” and “does not reflect the reality of the risk and unduly penalises insured exposures”, arguing that the empirical loss for insurance-backed exposures over the last 15 years is almost zero.
The International Trade and Forfaiting Association said a reported €4bn decline in insured exposures by EU banks in the first six months of last year could be blamed on the Basel change, which it labelled a “significant and avoidable inefficiency”.
In a joint submission with the International Credit Insurance & Surety Association and other insurance-focused bodies, the association called on the Commission to cut the LGD in half to 22.5%, citing its assessment that the required capital is double that of “observed riskiness”. Such a move would reignite growth in the product and allow banks to increase their lending capacity, the associations argued.
They said the insurance was most commonly used to lend to large corporates, on project and asset-backed finance, and for trade finance instruments. Almost half the lending insured by EU banks supported non-investment grade lending “where fewer alternative credit risk mitigation tools are available”, according to the submission.
The UK also imposed the tougher capital treatment of credit insurance in its implementation of the Basel reforms.
