The letter, which is jointly signed by banking associations and industry coalitions from around the globe, expresses concerns over the impact proposed banking regulations affecting trade finance could have on global economic recovery. The proposed regulations, commonly referred to as “Basel III,” include a proposed increase on capital requirements for trade finance transactions, which are generally fixed, short-term instruments that are self-liquidating by nature and, therefore, low risk.

 

WTO trades spokespeople say the banks need to produce data to support their argument that trade finance is low risk. Yet, the International Chamber of Commerce and the Asian Development Bank have compiled data that demonstrates from 5.22 million trade transactions conducted around the world, including the two years of the financial crisis, the incidence of default was low.

 

As such, the banks maintain that Basel III has the unintended consequence of worsening trade finance conditions for companies – including small-and-medium-sized enterprises (SME’s) – involved in the import/export business, especially in emerging markets. The BAFT-IFSA says its letter enjoys broad support amongst banking and industry groups and remains an open letter as other interested parties continue to sign it.

 

The letter notes that because global economic recovery rests largely on the shoulders of emerging markets and SME’s, an increase in trade finance capital requirements will mean an increase in the cost of trade credit, which will, in turn, slow commercial activity and economic recovery. It further states that since emerging markets and SME’s generally rely more heavily on trade finance instruments than revolving bank loans, policies that put the affordability of such instruments at risk could not only hinder global economic recovery, but could actually work at cross-purposes to the stated economic goals of the G-20.

 

Donna K. Alexander, CEO, BAFT-IFSA, noted that the concerns expressed in the letter reiterate those raised by BAFT-IFSA and the other signatories that responded to the Basel Committee recommendations released in December 2009. In April, BAFT-IFSA submitted a comment letter in response to the Basel Committee consultative paper. “Clearly we support the Basel Committee’s goal of improving resiliency in the banking sector,” said Alexander. “However, we wish to highlight that trade finance instruments maintain a much lower risk profile in comparison with other financial instruments. Failure to take this into account could result in reduced trade flows, at a time when affordable trade credit is essential to continued economic recovery around the globe. We stand ready to help craft workable solutions to what we believe are the unintentional consequence of well-intended measures.” The letter closes by encouraging the Basel Committee to reconsider its recommendation and suggests that capital rules for trade finance should reflect the risk and economic realities of such transactions in light of the important role of trade finance in global economic growth.