Banking Regulation and the Campaign to Mitigate the Unintended Consequences for Trade Finance: A Milestone Report
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While well-meaning, post-crisis regulation and compliance requirements have unintentionally led to the exacerbation of the so-called “trade finance gap”. This milestone report aims to provide an overview of how the industry can work together with regulatory bodies to help alleviate such negative impacts, promoting a fairer treatment of trade finance within banking regulation.
Significant gaps remain in the provision of trade finance, particularly for small and medium-sized businesses, and most notably in emerging markets. The trade finance gap – the difference between the demand and supply of trade finance – currently stands at US$1.5 trillion, according to figures from the Asian Development Bank.
Regulation and compliance requirements that have come into force since the 2007 financial crisis have unintentionally led to the exacerbation of this financing gap. In order to minimise risk, banks are actively reducing their number of correspondent banking relationships – particularly in emerging markets – thereby affecting companies that need financing the most.
The report outlines, therefore, that while strong and focused regulation is necessary for a healthy financial sector, the phenomenon of de-risking threatens the economic prospects of emerging markets.
“Clarification and harmonisation of regulation are fundamental to mitigating the serious threat that de-risking poses to the financial system,” says Olivier Paul, Director, Finance for Development, ICC. “ICC, for its part, is proactively working with regulatory bodies worldwide to promote the fair treatment of the industry and increase access to the market.”
The report examines a number of areas where successful lobbying has led to improved treatment of trade finance instruments, notably:
Paul adds: “Despite the progress achieved to date, significant work remains to be done. With regulatory adoption and implementation processes taking up to a decade, it is essential that discussions take place from the earliest of stages if we are to effect efficient and meaningful change.”
The report also outlines how digitalisation could help to increase cost and time-efficiency, aiding the fulfilment of compliance and regulation requirements. Distributed ledger technology, for example, could help make transactions more secure, by giving more power to banks and regulators to trace and evaluate financing, in turn alleviating some risk.