Recent moves in Europe to exempt export credits from banks’ leverage ratios have been received positively, but is this good news for all export finance banks?
Last month, EU ambassadors endorsed the capital requirements regulation adjustment package, including an exemption for export credits from the leverage ratio. On the face of it, this should resolve a long-standing headache for export finance banks, who would suffer under Basel III due to a lack of an exemption from the leverage ratio calculation from the export credit agency (ECA)-backed portion of any transaction, despite the near-zero credit risk of an ECA.
After years of advocacy by the European Banking Federation (EBF) export credit working group, the ICC global export finance committee and the ICC regulatory advocacy committee, along with support from the Berne Union, various European ECAs and national banking associations, the export finance community can now claim a victory. An amendment to article 429 of the European capital requirement regulation now stipulates that all EU ECAs are fully exempted for export credits in their national currency, while in other currencies, export credits are fully or partially exempted according to the rating of the respective sovereign.
In practice, this will mean the traditionally low-risk business of export finance should become more attractive for banks, bringing much-needed liquidity to the market.
“The regulatory relief is a strong signal that this is business which is officially wanted, and of course it also helps the industry to a certain extent to survive,” says Ralph Lerch, head of export finance origination and forfaiting at DZ Bank, and member of the export finance committee of the ICC. During his five years as chairman of the European Banking Federation’s (EBF) export credit working group, Lerch worked to educate regulators on the existential risk to export finance of Basel III regulations.
He adds: “It is from my perspective a very positive move that the EU has not only exempted the EU ECAs for the national currencies alone. Due to our advocacy, we have more or less convinced them [regulators] that the European ECAs cover more than 50% in US dollar loans, and this is of course the currency of most of the emerging markets.”
A pain for Spain?
Another former EBF export credit working group chair, Henri d’Ambrières, tells GTR that a reluctance on the part of EU regulators to go further with this regulation could mean some exporters may be put at a disadvantage. “There is a limitation. The regulators in Europe decided to grant the exemption of the leverage ratio to export credits for all loans covered by an ECA with any type of currency, if the ECA is rated AA- or above. So, this means that if the loan is covered by UK Export Finance or Euler Hermes, the bank can extend the loans in euros or pounds or dollars, and the exemption will be there. However if the ECA is rated lower than that, as in the case of Spain, then the exemption is only valid in the domestic currency of the ECA.”
This could lead to Spanish exporters losing competitiveness against their German counterparts in markets such as Latin America. The two countries jointly account for 40% of all EU exports to the region, and compete in areas such as capital goods for Latin America’s booming renewable power sector – usually purchased in dollars.
Other unintended consequences of this exemption could be that it lowers pricing, and in an industry where margins are already wafer-thin, any decrease could result in some players being shut out.
“It will help banks with existing large portfolios who are keen to get leverage relief on their existing book. It will also benefit banks with small portfolios that are keen to grow their ECA assets due to its exemption on the leverage ratio,” points out Gabriel Buck, managing director of GKB Ventures, a consultancy focused on cross-border trade. “This is going to appeal to European banks who are long on euro funding. It will also benefit borrowers and exporters using European ECAs in euros as, in my opinion, pricing should reduce.”
But both d’Ambrières and Lerch stress that they see negligible impact on pricing as a result of the changes. “The leverage ratio is a constraint for some banks, and this will help them to come back into the business. I do not think that will have a great impact on pricing; it will help banks,” says d’Ambrières.
“If we had not been successful with the relief, potentially for some banks, the business would have been sooner or later too expensive to compete further. The capital relief is a strong signal to encourage banks to stay in the business,” adds Lerch.
Levelling a bumpy playing field
In today’s era of weaponised trade and tit-for-tat tariffs, any move by a regulator to smooth the way for its exporters will be eyed with some suspicion, and this is no exception. In off-the-record conversations with GTR, US export finance bankers complain that the amendment could give European banks a significant advantage over their US counterparts, particularly in dollar-funded transactions.
“It may not be attractive to North American banks, particularly if their previous advantageous position was cheap dollars,” says Buck. He adds that euro funding of ECA assets has been growing in recent years, and believes that this change may accelerate that growth even further.
“My opinion is that there is a war on exports. So if an ECA or a group of exporters or their banks can find a competitive advantage through regulatory relief, then that’s a competitive advantage they are going to want to have,” adds Buck. “The question is, how quickly can other regulators adapt and change?”
More to follow suit?
While this exemption for export credits does impact positively upon the majority of European exporters, the extent to which regulators in other geographies will be concerned is unclear.
“The American banks are in general not so active in export finance. The Japanese banks have their subsidiaries in Europe, so they act via their subsidiaries under European regulation. In terms of the competitive landscape, there is not much left which is really in a difficult position,” says Lerch. He cautions that this exemption is not the panacea to all ECA-backed exporters’ woes. “The issue is that we have to look at competition with non-OECD ECAs. This is one of our major challenges, and this is something we cannot win only by adjusting our capital regulation or by supporting more favourable funding.”
With this change, the EU has confirmed what export finance banks have been saying all along: that ECA assets are different from other forms of finance, and should be treated as such. But whether this will be enough to keep banks in the export finance business remains to be seen.