ICC advocates a more strategic regulatory treatment of trade finance

The call came at a recent meeting of the Basel Committee on Banking Supervision (BCBS) with industry representatives in Frankfurt. The meeting, which took place last week, provided an opportunity to discuss the BCBS reform programme, which aims to effectuate a banking and financial system that will act as a stabilizing force on the global economy.

Expressing concern that overly stern regulatory treatment of trade finance might impede trade recovery, Jean Rozwadowski, Secretary General of ICC, told participants: “Trade finance deserves a more favourable and more strategic regulatory treatment, since it has historically maintained a low-risk profile in comparison with other financial instruments.”

Trade finance is short-term and self-liquidating, and its success can be attributed in large part to the fact that its use is steeped in a set of clear rules set out by ICC. Mr Rozwadowski told the meeting that the resilience of trade finance had been demonstrated during the worst crisis since World War II and underscored that its transactional nature had allowed banks to carefully manage exposures. “ICC notes that not a single bank defaulted because of trade finance,” he said.

ICC applauds the BCBS’s willingness to engage with industry representatives and is encouraged that the inter-institutional dialogue of the last few months has been constructive. “The meeting is a clear indication that BCBS is paying close attention to the impact of the new rules on the banking industry and the economy,” said Mr Rozwadowski. The G20 has asked for the reforms to be finalized by the end of 2010.

Recognizing that rules are much needed to strengthen the banking sector, Mr Rozwadowski told the gathering: “Regulators need specific data and fact-based analysis to make sound judgment.”

To help, ICC, in partnership with the Asian Development Bank (ADB), has established a pilot trade credit default register to analyze trade finance performance data. ICC is now seeking to collect a full set of representative default data over a five-year timeframe, a period judged reasonable to reflect both the highs and lows of the recent credit cycle.

“The core idea of the register is to demonstrate empirically that trade finance carries low risk compared with other forms of finance,” said Dan Taylor, Vice-Chair of the ICC Commission on Banking Technique and Practice.

ICC urged the creation of a specialist trade finance working group to examine the issues that arise when the existing regulatory framework is applied to trade facilities. “ICC would be delighted to participate in the work of such a group if created by the Basel Committee,” Mr Rozwadowski concluded.