Proposed changes to US bank capital rules could make supply chain finance less attractive for large lenders and more expensive for corporate users, Baft (the Bankers’ Association for Finance and Trade) has warned.
Under draft reforms unveiled in March, banks could be required to set aside 10% of supply chain finance (SCF) exposures as up-front capital due to a broadening of the definition of a bank’s “commitment” to extend credit, purchase assets or issue credit substitutes, Baft said in a comment letter to regulators published this week.
The plans are part of the proposed US implementation of the final tranche of Basel 3 reforms, known in the country as Basel Endgame.
The mooted broader definition of a “commitment” would apply to banks using the risk-based capital calculation approach, which are typically the very largest US lenders that dominate the market for supply chain finance.
Baft argued the generally short-term and self-liquidating nature of supply chain finance programmes “does not warrant a bank having to hold up-front capital”.
“Supply chain finance programmes are not big revenue generators for the banks that host them for the very reason that supply chain finance offers a cheaper form of financing resulting in less profit for the bank,” the comment letter, dated June 18, said.
“Any slim profit that banks gain from supply chain finance purchases or financing in the form of the discount would be outweighed by the new 10% capital set-aside requirement.
Because of their “narrow margins”, SCF programmes “would undoubtedly be less attractive for banks to offer”, Baft said.
“Supply chain finance programmes would become less available to those desiring these products and services. US anchored supply chains would be disadvantaged relative to other countries where SCF programs are not subject to these restrictions.”
SCF facilities should not be considered commitments because they are “almost never” legally committed, Baft said, and rarely include a dedicated credit line or limit in the programme documentation.
The Bank Policy Institute, an influential research and advocacy body for US banks, has also called on federal regulators to maintain the current definition of a commitment. It argued the change “introduces substantial ambiguity” and could result in firms inconsistently interpreting what it called the “unclear expectations” introduced by the proposal.
The new definition of a commitment mooted by US regulators is derived from the Basel Committee on Banking Supervision capital requirement framework that is slowly being implemented worldwide.
While some countries have adopted the framework wholesale, others allow deviation from the text. The EU and UK, for example, have both maintained a lower treatment of core trade finance products instead of adopting the tougher approach stipulated by the Basel text.
Baft also called on US regulators to mirror the UK Prudential Regulation Authority’s move to scrap the link between off-balance trade finance products and maturity. The organisation said adopting the Basel framework’s definition of trade finance exposures having a maturity of generally less than one year would penalise financing for expensive capital goods such as heavy machinery and aircraft.
The group said risk sensitivity should be calibrated “to encourage competitiveness and promote economic growth, consistent with US ‘America First’ trade policy”.
“Right-sizing the treatment of trade finance products will ultimately help strengthen the US dollar and strengthen the US’ position as the leader in trade in the world while maintaining appropriate safety and soundness guardrails,” the organisation argued.
Other industry associations have again urged US regulators to consider using the capital requirements overhaul to make it easier for locally headquartered banks to trim their regulatory capital burden by using credit insurance.
Credit insurance is one of the main methods banks in Europe use offload lending risk, but use is limited in the US because capital rules do not recognise exposures to insurers in the same way as the EU and UK.
The International Trade and Forfaiting Association and the International Association of Credit Portfolio Managers said in a joint comment letter that the US framework should be tweaked to include multi-line insurers as eligible guarantors.
Such a change would allow banks to reduce capital on exposures that are covered by credit insurance policies issued by highly regulated insurers.
