10/25/2011 11:01 am ET Updated Dec 06, 2017

Basel Committee Eases Regulations On Trade Finance

LONDON/PARIS, Oct 25 (Reuters) - Global banking regulators eased their capital reserves rules on Tuesday to boost trade with low-income countries, sparking industry calls for broader changes.

The Basel Committee on Banking Supervision, made up of regulators and central bankers from nearly 30 countries, has allowed banks to take a more flexible approach to assessing the credit risk of trade finance and hence the amount of capital they must hold against guarantees.

"The agreed changes will improve the access to and lower the cost of trade finance instruments for low income countries," the Swiss-based committee added.

The Basel Committee said it has agreed to waive the so-called sovereign floor for certain trade-finance related claims on banks using the standardised approach for credit risk.

A bank wanting to finance a shipment of shirts from Pakistan, for example, could now assess the credit risk on its own terms and will not have to take Pakistan's sovereign credit rating as the most favourable possible credit opinion.

Trade finance experts say such insistence on the "sovereign floor" rule had made trade finance too expensive, even though it was extremely safe.

Banks would also be able to use shorter-dated instruments to back letters of credit used in trade operations compared with the current one-year minimum maturity floor.

Countries can make the changes to their trade rules immediately.

The Basel Committee said it made the changes after evaluating the impact of the existing Basel II global bank capital rules and the new Basel III accord which is being phased in from 2013.

It consulted with the World Bank, World Trade Organisation and the International Chamber of Commerce (ICC).

ICC Secretary-General Jean-Guy Carrier told Reuters that more can be done.

"Our hope is that (the Basel Committee) can continue in that direction, to essentially exempt trade finance transactions in general," Carrier said.

The ICC had been pushing Basel regulators for the last couple of years to appreciate the "vital" nature of trade finance for the world economy, as well as its "negligible" default risk and rapid transaction turnover time.

"There will be a negative impact on trade if you lump trade finance in with every type of financial transaction."

The Basel Committee may have pre-empted pressure from world leaders meeting next month.

WTO chief Pascal Lamy had held a meeting with his expert group on trade finance, which includes representatives from banks such as JPMorgan , HSBC and Standard Bank to decide what message to send to the Group of 20 leading economies (G20) meeting in Cannes early November.

A source told Reuters this month that a lack of financial guarantors would lead to a return to the days of "suitcase banking" with large sums of cash being lugged from buyers to sellers. (Reporting by Huw Jones, additional reporting by Tom Miles in Geneva; Editing by Will Waterman and Erica Billingham)

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