Banks and businesses are calling for EU regulators to amend the proposed new capital requirements to ensure that access to trade finance remains freely available for small and medium-sized enterprises (SMEs).

The new capital rules known as CRD4 are the EU’s interpretation of the recommended Basel III regulations.

A draft version of the plans was presented at the European parliament by Othmar Karas, an Austrian MEP on Monday January 23, and although plans to stabilise the financial sector have been welcomed, both corporates and banks think the rules will impede economic growth.

“The need to increase the resilience of the financial system to avoid future crises cannot be questioned. However, this cannot come at the expenses of the real economy,” comments Gerhard Huemer, director for economic and fiscal policy at UEAPME, an organisation that represents the interests of European crafts, trades and SMEs.

“As funding from banks is the most important source of external finance for the SME in the EU, it is crucial to ensure that the new EU rules for capital requirements under discussion at the European parliament do not hamper this fundamental funding channel,” he adds.

Huemer’s comments were made at a roundtable discussion at the European parliament held following the presentation of the draft plans, hosted by MEP Bendt Bendtsen and co-hosted by Barclays and the UEAPME.

Tan Kah Chye, global head of trade and working capital at Barclays added that regulators need to continue to work with banks to ensure certain measures did not damage the ability of banks to allow SMEs to trade globally.

More than 70% of Barclays’ trade finance clients are SMEs, Tan notes, remarking that these companies would be disproportionately affected if the Basel III regulations and CRD4 provisions were imposed as they currently stand.

“SMEs are the economic backbone of the UK and Europe and the current proposals need to be modified to ensure SMEs will have greater access to trade finance, not restrict their ability to grow exports,” he says.

“EU policy-makers have the responsibility of developing a robust banking environment to support SMEs to create jobs through trade. It is crucial that the cost of capital for a low-risk activity like trade finance is differentiated from high-risk activity”.

To date both the Basel regulators and the draft CRD4 plans have taken into account industry requests to remove the minimum one-year maturity for all trade transactions, as well as the elimination of the national discretion to waive the minimum maturity floor. The Basel Committee agreed to these changes in late October last year. Such moves have been welcome by Tan and the wider industry.

“The difference between a 90-day trade finance transaction and a 10-year project finance transaction is as large as the difference between a 30-day credit card and a 30-year housing loan. Both Basel III and CRD4 rightly recognise the difference between a credit card and a housing loan as there are different correlation curves for these two products. Similarly, a different correlation curve is needed for trade finance,” Tan says.

However the Barclays banker goes on to highlight additional recommendations to the commission’s proposals such as the application of a 20% credit conversion factor (CCF) to medium and low risk products and a 50% CCF to apply to medium risk products. Current Basel recommendations suggest a 100% CCF be applied to contingent trade finance exposures such as confirmed letters of credit.

Tan also recommends the recognition of trade finance transactions as fully liquid assets for the purpose of full liquidity inflows.