Friday, 27 January 2012 12:11
The "Basel III" rules risks jeopardising trade finance, according to Global Head of Trade and Working Capital Kah Chye Tan.
The European Union implementation of "Basel III" rules on capital requirements risks jeopardising the provision of trade finance with the greatest impact on Europe's SMEs, according to Barclays plc (LON:BARC).
At a roundtable discussion at the European Parliament, Barclays spoke about the profound impact new EU rules for capital requirements (CRD IV and CRR) would have on the ability of SMEs to export.
Kah Chye Tan, Global Head of Trade and Working Capital at Barclays, said that much of Basel III would help to make the banking system safer and stronger and should be welcomed. But regulators still needed to work with banks to ensure certain measures did not disproportionately damage the ability of banks to allow SMEs to trade globally.
More than 70% of Barclays trade finance clients are SMEs and Tan said that these companies would be disproportionately impacted if the Basel III regulations and CRD IV provisions are implemented as they currently stand, which would have a significant knock-on impact on growth.
"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," Tan said.
"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".
Recent International Chamber of Commerce research which examined more than 10 million trade finance transactions found a default rate of just 0.00026%, or one in 3,800.
"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 CRD IV 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 said.
Taking changes forward
Tan welcomed the favourable steps made in the draft European Commission's report on CRD IV produced by Othmar Karas MEP, and stressed the need to take these changes forward in the forthcoming political negotiations between the different European institutions. Specifically, he remarked on the importance of the removal of the minimum one year maturity for all trade transactions as well the elimination of the national discretion to waive the minimum maturity floor.
- 20% credit conversion factor (CCF) to apply to medium/low risk products and 50% CCF to apply to medium risk products; and
- Recognition of trade finance transactions as fully liquid assets for the purpose of full liquidity inflows.
Tan welcomed the emphasis put in the CRD IV proposals on the pending results of the trade finance impact study conducted by the Basel Committee on Banking Supervision in relation to the adoption of a separate correlation curve for trade on the basis of these results.
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