By John Richardson
NEW banking regulations could severely restrict the ability of small and medium-sized (SMEs) companies to access trade finance. This would hit Asia particularly hard, as the majority of chemicals and polymer business involves SMEs.
Under the Basel III regulations, due to be phased in from next year, a three-month trade finance loan will be treated the same as a one-year loan. This will force banks to hold more top quality capital against this type of lending, according to the Financial Times.
This is deterring some banks from staying in the trade-finance business and could increase the cost of letters of credit by 300 percent or more, adds the newspaper.
Some French banks have already decided that the extra regulatory burden is not worth it, and so they have withdrawn from the trade-finance business, says the FT.
“Basel III’s implementation could have unintended consequences for trade financing through the proposed leverage ratio, which would require banks to set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit,” says the World Bank.
“This is five times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regulations would also require banks to set aside capital for one year for any instrument, even though that security may carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days; this would triple the capital cost of such instruments.”
Trade finance volumes could fall by 6 percent, representing a $270bn a year reduction in global trade and a 0.5 percent decline in global gross domestic product, the World Bank adds.
‘Eighty-five per cent of all letters of credit will have Asia at one end or the other,” said Andy Dyer, managing director of transaction banking in Asia Pacific for ANZ, in this article in Singapore’s Business Times.