Exclusive: Trade finance groups push for looser loan rules
GENEVA (Reuters) - New data on trade finance show the traditional loan instruments are almost risk-free, raising hopes that regulators will relax their treatment and spur world economic recovery, a banking official said on Wednesday.
Trade finance is the lifeblood of global commerce, underpinning 80-90 percent of the $12-13 trillion in merchandise exports shipped around the globe each year.
But banking regulations introduced before the financial crisis, and proposed revisions to the rules, are driving up the cost of trade finance unnecessarily, threatening to hobble the recovery in world trade and the global recovery, bankers say.
To prove how relatively risk-free trade finance is, the International Chamber of Commerce (ICC) and Asian Development Bank (ADB) set up a database of trade finance deals.
Bankers are now discussing the first results from the database with national and global regulators to illustrate their view that treatment of trade finance under the Basel rules is too strict, said Donna Alexander, chief executive of the international financial services association BAFT-IFSA.
"We're getting some feedback that it was truly unintended. They're listening to our concerns," she told Reuters.
Bankers had long argued that the short-term, self-liquidating nature of trade finance made it one of the safest forms of lending, but tougher rules would tie up capital meaning banks could not provide as much finance as requested.
Banks funding exports make painstaking checks on the identities of buyer and seller, and use financial instruments secured on the shipments they are financing, some of which date back to the Middle Ages.
Practitioners say the risk weighting of trade finance under the current rules, known as Basel II, is already too tough.
And trade finance, much of which is held off banks' balance sheets, will be treated even more strictly under proposed new Basel III rules, as regulators try to prevent banks hiding toxic assets off balance sheet, one of the causes of the crisis.
The ICC/ADB Trade Finance Default Register now has data from 5.22 million transactions worth $2.5 trillion conducted around the world by nine major banks over the past five years.
Over the five-year period, participating banks reported only 1,140 defaults, a rate of 0.02 percent, and 445 defaults out of 2.8 million transactions during the severe 2008-2009 downturn -- a default rate even lower than many practitioners had expected.
Tan Kah Chye, chairman of the ICC banking commission, and global head of trade finance at Standard Chartered, met regulators in Basel on Wednesday, an ICC spokeswoman said.
A spokesman for the Bank for International Settlements, which hosts the Basel Committee on Banking Supervision that draws up the banking rules, was unable to comment.
But Tan said in a statement after the findings of the database were presented to a conference of the ICC banking commission last month that the register demonstrated clearly that trade finance was less risky than other forms of lending.
"Already, the initial data gathered give us an indication that trade finance might warrant some kind of revised capital treatment," he said.
The current Basel II rules treat all short-term loans as if they run for at least one year, requiring banks to set aside capital accordingly, unless national regulators are flexible. Only Britain has waived this one-year rule for trade finance.
But the default database shows that most trade finance transactions are short-term, averaging 115 days.
The World Trade Organization expects merchandise trade to grow by 13.5 percent this year after suffering its biggest contraction since World War Two last year.
But Alexander said firms in emerging economies and small businesses generally were particularly dependent on trade finance and risked being cut off from funds unnecessarily, limiting the extent of the recovery.
The ICC declined to name to nine banks in the project.
Major players in trade finance besides Standard Chartered include BNP Paribas, Citibank, Deutsche Bank, HSBC and Royal Bank of Scotland.