Business Responding to the Financial Crisis
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In this context, the ICC recommended that, if a leverage ratio is to be adopted, a framework should be developed to allow trade finance products to retain the CCF values used under the current Basel II framework. It is the ICC’s view that such an approach would be consistent with the G-20 agenda to promote trade finance without compromising the overall objective of the Basel Committee proposals. Views of 2011 ICC global survey respondents
In the 2011 survey, 81 percent of respondents indicated that their financial institutions were aware of the new regulatory regime imposing new capital, liquidity, and leverage requirements on all banking activities. The survey asked this question: “Do you anticipate that the Basel III requirements will cause your bank to reassess its trade finance strategy and products?” Thirty-four percent of the respondents said yes. Altogether, 31 percent of respondents also indicated that regulatory constraints had negatively affected their businesses in 2010. An alarming 57 percent of respondents said they lacked sufficient information about new regulatory requirements at this stage—indicating an information gap between the industry and policy makers. Some 35 percent of respondents said they expected the Basel III requirements to “negatively” or “very negatively” impact their trade finance business. Not surprisingly, ICC respondents have been seriously concerned about the unintended consequences that could arise from the new regulatory regime, which indiscriminately puts trade finance in the same risk class as other high-risk financial instruments. According to the respondents, the increase in the leverage ratio under the new regime would significantly curtail their banks’ ability to provide affordable financing to businesses in developing countries and to SMEs in developed countries. Banks are now likely to be required to set aside 100 percent of capital for any off-balance-sheet trade finance instruments such as commercial LCs (against 20 percent under Basel II), which are commonly used in developing and low-income countries to secure trade transactions. Specifically, survey respondents expressed the following concerns: • Banks could move away from trade finance. There is a risk that small- to medium-size banks will move away from the trade finance market, significantly reducing market liquidity and the availability of trade finance. • The timing of implementation could have unintended consequences in different regions. Considerable uncertainty persists about the impact of Basel III because of the role of regional regulators in deciding the local form of the rules. At this point, under the new regime, the movement of contingent liabilities onto balance sheets, financial institution counterparty risk weighting, and the weighting of export credit agency exposure could vary by country.