Basel III Regulatory Framework update will benefit global trade, ICC says

As the majority of trade flows are supported by some form of trade finance, ICC has welcomed the latest refinement to the Basel III Framework – a set of reform measures designed to regulate the banking sector – as a constructive step in ensuring balance between prudent regulation, adequate access to trade finance and a sustainable recovery of the so-called “real economy”.

ICC particularly commends the Basel Committee on Banking Supervision (BCBS) for recognizing the importance of trade finance in growth and job creation and adopting a more favourable calibration of the Basel III leverage ratio. Kah Chye Tan, Chair of the ICC Banking Commission said: “Trade growth, especially in emerging markets, cannot be achieved or sustained without the necessary levels of trade finance, and the refinements to the Basel III Framework represent an important development in keeping trade finance affordable to end-clients, by making capital requirements and related capital costs manageable for trade finance banks.”

Access to trade finance link

The role of trade as a driver of global growth and prosperity has motivated a constructive dialogue among government representative, regulators and business on the importance of assuring affordable access to trade finance in support of international commerce. As a result, the crucial link between access to trade finance and the ability of businesses of all sizes to pursue opportunities in international markets is more widely appreciated and understood.

The global economy is showing signs of recovery, with the World Bank projecting an acceleration of global growth from 2.4% in 2013 to 3.2% in 2014. While emerging and developing market growth rates are expected to grow at a slower pace, consumer demand and investment activity in developed countries is projected to rise and create momentum in emerging market export activity. Trade-based growth will be a core component of overall economic recovery. Projections suggest global trade rising by 4.6% in 2014 and 5.1% in 2015.

The refinement to the Basel III Framework, announced on 12 January 2014 by the BCBS, reflects the fundamental characteristics of trade finance, including the self-liquidating nature of “real economy” transactions that support the exchange of good and services. ICC said that the amendment represents a very positive development at a time when robust trade is of critical importance to ongoing global recovery and continued growth in global GDP.

“The BCBS amendments on the treatment of off-balance sheet items recognize the intrinsically safe nature of trade finance instruments as evidenced by the ICC Trade Register – the first performance database for trade finance assets, such as letters of credit,” said Thierry Senechal, Senior Policy Manager, ICC Banking Commission. “Comprising data provided by over 20 Banks on more than 15 million short-term trade finance transactions the ICC Trade Register 2013 confirmed that trade finance transactions have enjoyed a relatively low likelihood of default in recent years. The Trade Register, initiated in 2009 at the height of the economic crisis, has been instrumental in fostering a constructive dialogue with regulators and policymakers at a global level.”

Potential for growth

Even as the importance of dynamic trade is acknowledged at the most senior levels of government, international institutions and business, industry analysis suggests that there is a significant global trade financing gap, estimated to be as high as US$2 trillion. This implies that there is potential for significant additional trade-based growth, provided the requisite financing support is available.

Neil Chantry, Chair of the Executive Committee of the ICC Banking Commission said: “The ongoing collaboration between trade financiers, regulatory authorities and key stakeholders has been invaluable in motivating a better and more comprehensive articulation of the nature and value of trade finance. It remains vitally important today that we continue the work of the ICC Trade Register to analyse the low default nature of trade financing. Achieving a balance between prudential regulatory requirements and availability of liquidity and risk mitigation in support of international trade is in everyone’s interest.”

As the world’s essential rule-making body for the banking industry, the ICC Banking Commission remains committed to supporting and facilitating greater understanding of trade and supply chain finance, the role of financial institutions in providing this specialized form of financing across the globe and the direct, demonstrable link between financing, trade and the creation of economic value. In that spirit, the Banking Commission will continue to work, through partnerships and innovative approaches, to advance the effective and successful conduct of international commerce.