In the wake of the financial crisis, trade banks and their customers are in a changed landscape. Credit is tight, accounting regulations are stricter, and the impending revision of Basel II banking rules — referred to as Basel III — includes new and stringent capital reserve requirements. Basel III may prove extremely challenging to the players best placed to stimulate expansion and growth in the global economy through commerce.
Given what's at stake, how can regulators and providers best work together to prevent the next banking crisis while making sure trade finance customers don't pay too high a price?
Now is surely the right time for banks and governing bodies to work together on lending rules that will more effectively measure and mitigate risk throughout the credit system. The pending Basel regulatory changes call for a new approach to calculating risk capital that mandates significantly higher bank capital reserves.
Requiring banks to keep more core capital on hand will significantly affect global trade — particularly off-balance sheet trade finance instruments, such as letters of credit, which will be subject to increased regulation and additional capital charges. This has proved frustrating for trade bankers, exporters and importers alike, and the industry is communicating its issues to regulatory bodies, hoping to ensure that Basel III strengthens, rather than weakens, global commerce in a volatile economic period.
A continuing dialogue with the industry is critical to ensure that new measures for safeguarding the banking system are in concert with the actual risks related to the finance instruments that support global trade.