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The ICC Banking Commission has published a new report which puts forward the next steps for the industry to ensure that regulation does not act as a barrier to legitimate trade finance.

Titled Banking regulation and the campaign to mitigate the unintended consequences for trade finance, the report underscores the negative impact well-meaning regulation and compliance requirements have had on trade finance, and provides recommendations on how the industry should continue to work together to address them.

While progress to date promoting the fair treatment of trade finance across jurisdictions has been significant, regulation remains an important stumbling block for trade finance availability, with results from the 2018 ICC Banking Commission global survey on trade finance revealing nearly 90% of respondents see regulatory and compliance concerns as a major obstacle to growth.

Olivier Paul, director of finance for development at the ICC, spoke to GTR about the new risks on the horizon and what more needs to be done to keep the wheels of trade finance turning against an increasingly complex regulatory backdrop.

GTR: What are the main messages from the report?

Paul: The reality is that we need regulation. There is full recognition from the banking industry that we need guidance from governments and regulatory bodies.

We need fair treatment of trade finance transactions. Regulators have to take into account the reality of the business, how it works, what the level of risk is, and what the level of exposure is that the different actors are taking in a set transaction.

We have to get homogenous treatment of trade finance across different regions, otherwise it creates a competitive environment which is detrimental for the business.

Finally, regulators have to listen to industry bodies and the voices of different stakeholders and players in order to make sure that everyone understands each other.

 

GTR: Is there any more ground to be gained on convincing regulators of the low-risk nature of trade finance, or has the industry got as far as it possibly can with this particular issue?

Paul: The ICC’s trade register confirms year after year that the level of risk generated by trade finance transactions is very low. With respect to credit risk, most of the regulators on the planet are now totally convinced, so I do not think that there is more to be done in order to gain acceptance from them.

However, other categories of risk are emerging, and we need to ensure we demonstrate to the regulators that banks are handling these as well as they handle credit risk. This is one of the key issues that we will face in the years to come. We will need to demonstrate that trade finance transaction monitoring includes the complete spectrum of different categories of risk analysis – not only credit risk but also compliance and sustainability. One of the goals of this paper was to illustrate that we have already obtained several successes in terms of concessions from regulators.

 

GTR: What’s the best practice for co-operation between the industry and regulators?

Paul: The amendment of article 55 of the European bank recovery and resolution directive (BRRD), which allowed banks to apply for a waiver with the single resolution board if they considered there to be obvious explanations that justify not applying the rule, is a clear example. This was a situation whereby we had a differentiation in regulation between Europe and the rest of the world. The regulators clearly understood that there was an issue. They didn’t want to waive the article, but they did open the door for case-by-case treatment in accordance with the local regulator for each country. This was a good example of co-operation between regulators, the banking industry, and industry bodies such as the ICC.

 

GTR: How important is it that the trade finance industry works together to ensure regulation doesn’t adversely impact the business?

Paul: A difficulty that we could have is lack of alignment among the players around what we would like to obtain. We cannot ignore the situation between China and the US, for instance. We cannot ignore that there is a certain level of populism which is rising in Europe and in other countries. The risk would be that these political issues could somehow reduce the level of alignment that the banking industry could have in respect of upcoming regulations. Some regions of the world could be tempted to say, ‘no, I will not follow these recommendations’, and request another kind of treatment. If the industry is not aligned in the future, we run the risk of having in front of us regulators that will be totally in the driving seat and able to take decisions without any dialogue or common understanding.

 

GTR: In your view, what is the most pressing area where the industry needs to focus its efforts around regulation?

Paul: All the upcoming regulatory changes are already known, so I do not expect to see any new features appearing from one day to another. The risk lies in the side consequences of digitalisation and the emergence of new players who play the same role as banks with a level of regulation which is not exactly the same. To a certain extent, there is a risk that certain banks could consider that the level of required investment to get market share in this industry is too high in the face of a high level of regulatory constraints and competition coming from new players that are not subject to the same level of regulation.

That said, it is also true to say that new technologies could bring also new capacities in the market to help address the US$1.5tn trade finance gap. Even if there were no regulation at all, we can be sure that the banking industry as such could not fill this gap alone, so we need to have other players. However, we need to have homogeneous regulation.