Related News

Arqit aims to boost DNI uptake with liquidity tool

GTR Leaders in Trade: The shortlist

GTR Americas roundtable: Banking leaders chart future of trade finance

Adapting to turbulence: The evolution of global trade finance

UK export minister kicks off Barclays-ICC UK trade digitisation taskforce

Although the final Basel III package of banking reforms was agreed by regulators at the end of last year, the trade finance industry still has questions around the exact impact – and whether or not finality has indeed been reached.

In December, in what the industry has dubbed Basel IV, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), bridged the last remaining gap between regulators – particularly in the US and Europe – on the extent to which banks can use internal models to determine their capital requirements.

While industry players are pleased with the moderations that have been made, there are still some areas where they are calling for further reformation. A panel discussion at last week’s ICC Banking Commission annual meeting in Miami talked about the road ahead and unveiled some home truths – distilled here in five points.

 

  1. More work is needed, but regulators are unlikely to want to revisit issues just yet.

“There are some things that we would still like to see further reform,” said Brad Carr, senior director, digital finance regulation and policy at the Institute of International Finance (IIF), speaking on stage at the ICC’s event.

“In terms of the journey ahead, I think we need to be conscious and we need to be realistic that there is zero appetite from regulators to re-open this whole package. They’ve gone through a long and very tortuous process to get to this conclusion. I hope that they will be receptive to selective, very technical amendments around specific areas where there may still be an unintended consequence, and it’s going to be contingent upon us as an industry to bring data points to further substantiate that.”

Panellists highlighted conflicting ratios and binding constraints as some of the issues that require review.

 

  1. Regulators may have some appetite for minor tweaks rather than revisiting anything fundamental within the structure of the existing accord.

If the process is at a point where it is closing off one chapter with a new international agreement, it may now give rise to three sets of new regulatory focus areas, said Carr.

“One is whether there’s some appetite for minor adjustments and recalibrations. Second is national implementation and what that looks like, and whether or not that is as globally consistent as we would ideally like for the playing fields and for international business. And the third one is that we’re seeing a particular focus from regulators away from some of these traditional issues that to some extent have delivered relative certainty in having this final accord,” he explained.

Regulators are also moving on to new areas of risk in the financial system, including fintech innovation, Carr said. “It’s questions like: are banks innovating sufficiently to remain profitable and viable in a new environment and in the face of new entrants? Is risk going to migrate out of the regulated system and to some of those other entrants, and is that a threat to financial stability? And one question I would hope they would consider is: is the existing siloed structure of banking regulators, insurance regulators, securities regulators, etc, that are very entity-driven, is that sufficiently equipped to deal with the new market environment that probably needs more cross-sectoral approach in all areas?”

 

  1. It’s still Basel III, not Basel IV.

Although the ‘finalisation’ of Basel III has often been dubbed Basel IV, in its current incarnation, that’s not entirely accurate: it isn’t a new paradigm; it’s the continuation of Basel III.

Carr shared what he called the “best phraseology” on the topic, picked up from Andrea Enria, chair of the European Banking Authority.

“Enria said, ‘I’ve got a two-part litmus test on whether it’s III or IV. Is it a significant increase in capital and is it a loss of risk sensitivity?’ And I very much sign up to his assessment. I think if you looked at the original proposals in the early 2016 consultation documents, it would have been Basel IV. It would have significantly overshot the market; it would have eliminated risk sensitivity from a lot of parts of the banking system. Trade finance would have been the most hurt, where you have assets that by their nature tend to have strongly-rated counterparties, are often secured by tangible shipment goods, are short-dated and self-liquidating. You would have had a risk-based system largely overwritten by one that did not recognise any of those attributes.”

He continued to say that he is “really pleased that they’ve moderated a lot of the original proposals, and where we have landed, I think under Andrea Enria’s test it would indeed be rightly classed as Basel III”.

 

  1. It’s too soon to tell what the exact impact will be for banks.

Panellists, which also included Dominic Broom, global head of trade business development at BNY Mellon, and Dan Taylor of DLTaylor Consulting, agreed that the market is likely to be negotiating the next iteration of a Basel deal before the full implementation of Basel III takes place gradually over the next nine years.

“I said a number of years back – and I still believe this – that we really won’t know what Basel III actually means to the banks until 2020 – until we actually get somewhere into the implementation,” Taylor explained. “But I also believe that before we get there, we are going to start to see the evolution of a Basel IV – or whatever you call it – very quickly as we start to see the implementation.”

 

  1. It’s unlikely that trade will be treated as a separate asset class under the Basel framework.

Although it has often been said that there’s a case for treating trade – which is currently part of the corporate asset classes – as a separate asset class within the regulatory framework, regulators are unlikely to act on this.

“Politically, there’d be fairly limited appetite for any fundamental overhaul of the asset class structure,” said Carr.

“The incumbent regulatory perspective is probably that, whilst it might be a risk profile that is particular in some nature, nonetheless the underlying source of risk is about corporate default or bank counterparty default.”

Nevertheless, he agreed that some of the argument that has been made on the matter has been “justified”. “I think trade generally is a business that needs to be seen through a different lens.”