EU Accommodates Trade Finance in Basel III Implementation


The European Union tipped its cap to trade finance this week as it adopted Capital Requirements Directive IV (CRD IV), part of its ongoing implementation of the Basel III capital requirements. What's noteworthy about CRD IV is that it recognizes the inherently low risk associated with short-term trade finance transactions, ultimately allowing banks to hold less capital in reserve for these transactions and making it easier for them to provide export financing.

The EU's adoption of CRD IV came on the same day that the International Chamber of Commerce (ICC) released a report on how rare defaults are in trade finance transactions. Specifically, the report found that short-term trade finance transactions have a microscopic .02% default rate, compared to a 0.6% default rate for one-year, single A-rated corporate loans, a comparatively reliable transaction that defaults nearly thirty times as often as trade finance transactions do.

Among other provisions, CRD IV sets a lower credit conversion factor (CCF) for trade financing than previously suggested iterations of the Basel III reforms. For medium/low risk and medium risk off-balance sheet trade finance instruments, the CCF will be 20% and 50%, respectively. This means that banks won't have to keep the entire value of a trade finance transaction in reserve, thereby making this type of financing cheaper for banks to provide.

Advocates cheered the EU's decision. "Amendments agreed [to] by the EU institutions on capital, leverage and liquidity requirements for trade finance recognize the intrinsically safe nature of these products and their importance to companies, consumers and job creation," said Tod Burwell, president and CEO of BAFT-IFSA, an international trade banking association comprised of the Bankers' Association for Finance and Trade, and the International Financial Services Association. "Through these amendments, the European Union has taken significant steps to alleviate the regulatory burden for trade finance and to ensure it remains available and affordable to importers and exporters."

"This is a positive outcome for the real economy, and we ask the G20 and the Basel Committee to recommend that these Basel III changes be adopted in all member jurisdictions around the world," he added.

- Jacob Barron, CICP, NACM staff writer

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