ICC response to the Basel Committee Consultative Document on “Strengthening the Resilience of the Banking System”
Our comments, which have been developed through extensive consultations with our member companies, are set out in the following order: (i) a short review of the key features of trade financing; (ii) detailed comments on the proposals applicable to trade products; and (iii) a number of recommendations.
- The Basel Committee proposal
- The Impact on Trade Finance Instruments
- Potential Implications
- ICC Recommendations
Potential implications and ICC recommendations
Increasing the CCF to 100% for trade- and transaction-related contingencies for the purposes of calculating a leverage ratio could adversely affect the provision of trade finance instruments since banks may well be able to achieve higher yields with non-trade products. Consequently, where the leverage ratio becomes the “binding constraint”, banks may choose to increase the cost of providing trade products; or only selectively offer these products to customers.
It is our fundamental concern that this cycle will adversely impact on the supply of cost-effective trade credit, thus compounding existing, well-known market constraints. Such a situation would likely risk a significant dislocation of trade—contrary to the G-20 London Summit agenda to promote trade as engine of renewed growth.
As such, ICC recommends that if a leverage ratio is to be adopted, off-balance sheet trade products should be allowed to retain the CCF values used by banks under the current “risk weighted assets” calculation. This would point in the same direction as foreseen in the “additional option for impact assessment” in the consultative document, which would allow financial institutions to “Apply a lower (positive) CCF for unconditionally cancellable commitments or Basel II standardized CCFs”.
Given the broader concerns that exist about the impact of Basel II on trade financing, we suggest that it may be timely for the Basel Committee to establish a specialist trade finance “working group”. Such a group, we believe, would be well placed to examine some of the issues that arise when applying the existing regulatory framework to trade facilities, as well as the trade-related aspects of the Basel Committee’s proposals. ICC would be delighted to participate in the work of such a group if this would be of use.