Trade finance bankers hail dialogue with regulators

GENEVA Thu Oct 14, 2010 9:35am EDT

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GENEVA (Reuters) - Providers of trade finance and banking regulators have begun a dialogue on the unintended consequences of new banking rules for the crucial funding, the International Chamber of Commerce (ICC) said on Thursday.

The comments suggest that the Basel banking regulators will review the impact of new proposals, known as Basel III, on trade finance, the lifeblood of global commerce.

Practitioners of the traditional form of lending say it is unfairly penalized by the new rules as it is much safer than riskier financial asset classes targeted by the regulators.

At an unannounced meeting on Wednesday the Paris-based ICC, which sets rules for trade finance, and the Asian Development Bank (ADB) discussed the findings of a database on trade finance defaults the two institutions have set up, that show a default rate of only 0.02 percent, with the Basel Committee on Banking Supervision.

"Yesterday's meeting with the Basel Secretariat was very constructive and informative," said Kah Chye Tan, chairman of the ICC Banking Commission and head of global trade finance at Standard Chartered.

"We believe this meeting represents the beginning of a dialogue with the Basel Committee on a number of fronts in relation to Basel III, including potential unintended consequences on global trade," Tan said in a statement.

The dialogue would also examine how to refine the collection of data to demonstrate what was known intuitively: that trade finance carries relatively low risk, he said.

The Basel Committee declined to comment on the meeting or even confirm that it had taken place.

But in a statement mailed in response to a Reuters inquiry, the Basel regulators said they had received formal comments from the ICC on the impact of proposed new rules, adding: "... in the case of trade finance, we are fully aware of the issues."

Trade finance underpins 80-90 percent of the $12-13 trillion in merchandise trade, using instruments, some of which date back to the Middle Ages, that are short-term, secured on the cargoes, and repaid automatically when the goods are delivered.

Banks and other finance houses make painstaking checks on the identities of importers, exporters and shippers before approving the credits, resulting in the low default rate.

The ICC-ADB database gathers data from nine leading banks over five years, with 5.22 million transactions worth $2.5 trillion. In that period there were only 1,440 defaults.

The ICC said it now hoped to make that pilot project permanent. It was set up to provide hard data that could be used to demonstrate to regulators the anecdotal evidence that trade finance is much safer than other forms of lending.

Trade finance instruments such as letters of credit are held off banks' balance sheets while they are being processed. The could therefore fall foul of the Basel III rules designed to deter banks from hiding toxic assets off-balance-sheet, one of the causes of the financial crisis.

Heavier capital charges for such instruments would tie up bank funds that could be used to support trade, hobbling the recovery.

Although trade is rebounding this year, restraints on trade finance could hurt emerging economies and small businesses.

Bankers say even the existing rules, Basel II, impose an unfair burden on trade finance, whose importance G20 leaders underlined at their summit in London in April 2009 with a $250 billion package to revive the sector.

(Editing by Stephanie Nebehay and Philippa Fletcher)

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