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The EU has scrapped a plan to hike capital requirements for some trade finance instruments, sources close to the decision say, marking a victory for banks who vigorously opposed the changes.

The European Commission proposed in 2021 to bolster the capital treatment of trade finance products such as technical guarantees, performance bonds and standby letters of credit to comply with the final tranche of Basel standards on international banking regulation.

Banks complained that the move would push up the costs of providing trade finance, which in turn would be passed on to European customers. They enlisted corporates in a comprehensive lobbying campaign designed to thwart the plans.

On June 27, the European Commission, Parliament and Council struck a deal on a new EU Capital Requirements Regulation (CRR3) which includes abandoning the Commission’s planned lift to capital requirements for trade finance instruments, according to the sources and documents seen by GTR.

The credit conversion factor (CCF) – which calculates what a bank might have to pay out under an instrument and therefore its exposure risk – will remain at the current level of 20% for technical guarantees, the sources say.

Technical guarantees include warranties such as standby letters of credit, tender and performance bonds, and associated advance payment and retention guarantees.

Sources have indicated the final CRR3 text will also recognise “effective maturity” for trade finance instruments, instead of the proposed wording which would have imposed a 2.5-year maturity on instruments such as letters of credit, when provided to large corporates. GTR was unable to confirm the final position on maturity.

The European Parliament and Council announced on the morning of June 27 that a deal on CRR3 had been reached, in statements which did not mention the treatment of trade finance. A draft text of the legislation has not yet been published and it still requires formal approval by the EU’s three lawmaking bodies.

The Council, which comprises the EU’s 27 member states, had already indicated that it wanted to keep the CCF at 20% for the relevant instruments, while bankers involved in the discussions had previously told GTR that the Commission was open to dropping its original plans.

The Commission’s original text hewed closely to that of the influential Basel Committee on Banking Supervision, which sets banking regulation standards closely followed by regulators. The European Banking Authority and the European Central Bank are bitterly opposed to any deviations from the committee’s framework.

But critics of the plans argued that the committee’s treatment of trade finance was based on little, or decades-old, data on the credit risk posed by the trade finance products.

The banks’ advocacy campaign, led by the International Chamber of Commerce (ICC), leaned heavily on recent data showing low default rates for guarantees and similar products.

“We thank the member banks and corporates that have worked with us extensively over the past 18 months to provide the data and market insights that were needed to secure the agreement adopted today,” says Tomasch Kubiak, policy manager for the ICC Global Banking Commission, in a statement reacting to the Basel deal. “This has been a remarkable collaborative effort to preserve the viability of trade business in the EU.”

Sean Edwards, chairman of the International Trade and Forfaiting Association, says the body “is very pleased to read that the EU has decided to grant a 20% CCF for performance and related guarantees”.

“This is based on forensic data presented to the European authorities showing low loss rates for these products which justified the lower conversion factor,” he adds.

Technical guarantees are widely used by large European firms to secure high-value overseas contracts, such as in infrastructure and defence. French lenders and corporate giants, such as BNP Paribas, Société Générale, Airbus and Engie, were particularly outspoken in their opposition to tougher capital requirements for the products.

Financial institutions are also arguing against stricter capital treatment of banks’ exposures to insurance providers under the revised CRR – also inherited from the Basel framework – which they say would harm the effectiveness and cost of credit insurance.

The European Banking Authority has been tasked with finding a suitable capital treatment of such exposures and is expected to report by June next year, just six months before the January 1, 2025 implementation date for the new rules.

The UK last year published its plans for implementing the Basel 3.1 reforms, as the rules are known, which is in part even stricter than the Commission’s initial interpretation. The EU’s u-turn is likely to put pressure on the UK’s Prudential Regulation Authority to loosen its planned implementation.

“We hope that today’s outcome will send a clear signal globally on the imperative to carefully consider the capital treatment of trade assets in a number of important respects – based on robust industry data showing the performance of the asset class,” Kubiak says.

“Our hope is that the provisions secured in CRR3 will become a template for reforms in other major jurisdictions.”

Edwards says the EU’s decision “is the sort of constructive dialogue and pragmatic decision-making that all industry participants welcome from their regulators and, as discussions are ongoing with other regulators, we hope for a similar approach especially when this would be based on the same data”.

The broader deal on the implementation of Basel 3.1 includes implementing a so-called output floor aimed at limiting the use of banks’ internal risk calculation models, a harmonised “fit and proper” framework for senior executives and streamlined requirements for branches of third-country banks.

“After intense negotiations we have reached an agreement on updated rules which we believe will boost the strength and resilience of banks operating in the Union,” Swedish finance minister Elisabeth Svantesson says in a statement.

“This is a major step forward which will help ensure that European banks can continue to operate also in light of external shocks, crises or disasters. The swift implementation of global standards is also an important signal for our international partners and the EU’s continued commitment to international cooperation and multilateralism.”