Global: Basel III Debate Over Trade Finance


By Anita Hawser


Nivison: Trade is different

When the new Basel III capital adequacy proposals were announced back in the summer, some members of the banking community breathed a sigh of relief as the timeline for their introduction was relaxed, with the deadline for the new “core” Tier 1 capital ratio to be phased in by January 2015 and the capital conservation buffer, by January 2019. Despite the long implementation timeframe for the proposals, the details of which have yet to be finalized, banks’ trade associations, such as BAFT-IFSA, are already complaining loudly about Basel’s potential implications for trade finance. “From a trade perspective, most people would say Basel I wasn’t exactly right. Basel II got it even more wrong than Basel I, and now we are jumping off the cliff [with Basel III],” said Dan Taylor, president and chief operating officer of BAFT-IFSA. Speaking at SWIFT’s annual Sibos conference in Amsterdam in October, Taylor said studies indicated that Basel could potentially take $300 billion worth of trade flows off the table.

Major trade finance banks such as HSBC and Standard Chartered have also voiced their opposition to Basel III’s treatment of trade finance. Banks are particularly concerned about how leverage ratios will be applied to trade finance, as well as about Basel’s treatment of off-balance-sheet items, including trade finance, as “a source of potentially significant leverage.” BAFT-IFSA maintains that trade instruments are “intrinsically safe” and do not warrant such a treatment.

Stuart Nivison, head of trade and supply chain, Europe for HSBC Bank, says trade finance instruments are not used to create leverage but are put off the balance sheet by banks because of the underlying commerce—someone buying goods from someone else and paying for them later. “It is a very different beast, and that is not being reflected at present,” he explains.

Also speaking at the Sibos conference, Marc Auboin, an economic counselor for the World Trade Organization, challenged the banks to demonstrate that trade finance is a safe proposition by backing it up with data. The International Chamber of Commerce and the Asian Development Bank have done just that, with a database of five years’ trade finance defaults that shows only 1,440 defaults on a total of five million trades.