Global banking heads discuss the impact of the impending regulations on both the banks and their clients. Shannon Manders reports.
Speaking at the IFC’s annual bank partners meeting in Istanbul, bankers agreed that while it is inevitable that there will be a drop in trade finance supply and an ensuing increase in pricing, evidence of this has yet to enter the market.
Jeremy Shaw, head of Emea trade finance at JP Morgan told GTR that all banks are indeed already seeing the impact, though price increases are not necessarily passed on to the client from day one. Moreover, there is an understandable reluctance to be the first to implement the pricing hike as it would be “suicide” for business.
“What we as an industry need to do at this stage is to try and explain that the banks are not putting up pricing just for the sake of it. There is a real need for us to do it because we have to put aside significantly more capital,” he explained.
The panellists all accepted that banks need to be doing a better job in informing their corporate clients about the impact of the Basel III regulations. “That’s the big unknown here – what the impact will be on them and their SME clients and counterparties,” said Craig Weeks, managing director, global transaction services at Citi. “The trick is quantifying it. I’m not sure everyone has consistent statistics on it and it’s a big guessing game.
“If we’re going to convince our regulators and anybody else, we’ve got to move from anecdote to metrics. That’s going to be key.”
Export credit issues
Another area that will potentially suffer as a result of Basel III is the export credit agency (ECA) business; an issue which the panellists agreed had initially been ignored.
ECA-backed loans have a zero or very low-risk weight according to Basel II, but the leverage requirement with Basel III puts ECA financing in the same bag together with riskier assets. This one-size-fits-all solution will mean that banks’ ability to extend export credits will be limited.
“On one hand, some of the ECAs’ contractual documentation as it is today might not qualify for capital relief under Basel III,” explained Ferdinando
Angeletti, then-head of Eastern FIG, Intesa Sanpaolo. “But the other big issue is that traditionally ECA-backed loans have been long term and low-priced. That will conflict with the new liquidity coverage ratio and net stable funding ratio.” Angeletti added that unless ECA-backed assets are recognised as high-quality liquid assets, the market would simply become “unsustainable”.
Basel III’s net stable funding ratio states that assets which cannot be monetised within one year must be covered by stable funding, which could threaten the viability of ECA loans because of their long maturity. Additionally, under Basel III, ECA loans may not meet all requirements to be considered a liquid asset.
With the important role of ECA-backed finance not been taken into account in the formulation of the new rules, JP Morgan’s Shaw expressed his concern that the business will be “heavily penalised”.
“This is a great business because it’s low risk and is very important. It was an essential backstop form of financing when the capital markets dried up
through the crisis.”
Supporting a changing landscape
The changing landscape of trade business is set to open up opportunities for the IFC, which is changing its offerings by adding new short-term products and bringing some existing financing programmes to a close.
“We moved from a financial crisis where there was a liquidity shortage to one of capital allocation. And the international banks in particular are looking at usage of that capital,” said IFC senior manager, Scott Stevenson, addressing the confirming banks at the IFC’s Istanbul conference. “Many banks have already moved to a Basel III-type framework. Our programmes allow them to stay active in markets that might otherwise prove unattractive.”
Following the financial crisis, the IFC adopted a two-pronged approach to support trade in emerging markets; it increased its existing global trade finance programme (GTFP) and rolled out its global trade liquidity programme (GTLP).
In May, the GTFP reached the US$12bn mark in terms of guarantees issues, with no claims or defaults. With 211 issuing banks in 88 countries, the programme will continue to drive into riskier markets, Stevenson told conference delegates.
The GTLP, however, is set to be phased out. The programme was launched in July 2009 and has supported US$15bn of trade in emerging markets since its inception.
“The GTLP is going into its sunset phase,” said German Vegarra, IFC senior manager, noting that the programme, which was launched as a crisis response, has already reached its mid-point. It is expected that the programme will come to a close in 2013.
But Vegarra was quick to point out that the IFC will continue to develop other short-term finance products and align these with market needs. The IFC’s new and existing products continue to address the DFI’s strategic priorities, namely SMEs, food security and infrastructure. “The preferred model to do this is to continue to work with banks to support growth in these sectors,” he said.
The IFC’s products have been met with much praise from the banking community, due to its flexibility in the changing economic landscape.
“They’re able to anticipate the market needs, react, and then work with the banks to leverage their strength to bring what is needed to our communities,” said Ashutosh Kumar, global head, local corporate products and receivables at Standard Chartered, speaking to GTR at the IFC conference.
JP Morgan’s Shaw agreed that the IFC is one of the “essential tools in the toolkit” when it comes to building a sustainable risk-distribution approach.
“As we look to Basel III, we need to be looking at different and acceptable ways of mitigating risk,” added Shaw. “It’s not about credit exposure; it’s really about substituting AAA risk with a bit of your own local risk and a bit of cash-covered business to get to where we want to be with clients – to be able to serve them for the business, the tenors and the structures that they require to facilitate their business.”
However, it has been suggested that the IFC do more to facilitate a better understanding of their programmes among issuing banks.
“They need to help us explain to banks that when we try to use the programme it’s not because we’re not comfortable with their risk,” said Intesa Sanpaolo’s Angeletti. “The programmes work very well in Latin America; the banks have understood the programmes perfectly.” GTR