Calls grow to lower trade finance barriers

Advocates of trade finance are using the EBRD’s annual meetings to push hard for regulators to take a lighter approach to their industry, arguing that it is less risky than other financial assets.

Key players this week said they were sensing greater flexibility among regulators in the wake of the decision by the Basel Committee on Banking Supervision (BCBS) to remove a stipulation that short-term finance, often of three months, had to be capitalized for one year.

The big battleground now is the supervisor’s insistence that treatment of trade finance must be flat, meaning that a risk weighting of 100% is applied.

Advocates are amassing data to show their industry is safer than other parts of global finance. The WTO monitored trade finance worth $3 trillion and found 0.3% default rates, 40 times less than real estate in the US over long-run period.

Marc Auboin, WTO economic counsellor in the trade and finance division, said that of those defaults, a full 60% was recovered through sale of merchandise.

“We are saying to regulators, if you over-regulate the sector, if you make trade finance too expensive, you will affect the cost of production and encourage banks to sell their portfolios into the secondary markets,” Auboin told Emerging Markets.

BCBS has proved more willing to negotiate with trade finance advocates while the European Union has compromised on treatment of basic trade financing instruments as its pushes through the CRD4 directive that implements Basel III in the EU.

So far, the industry has held up surprisingly well in the face of bank deleveraging, at least compared to the crisis seen in 2008-09.

The Global Trade Finance Survey 2012 released yesterday by the International Chamber of Commerce group and sponsored by the EBRD showed volatility had dropped since the last quarter of last year when some 30% of capacity was removed.

Trade financing in the region increased in 2011, says Rudolf Putz, head of the trade facilitation programme at the EBRD, with CIS countries witnessing 30-40% growth.

However, much of the huge increase is accounted for by higher commodity prices and consumer goods rather than imports of machinery and investment as companies prove wary of increasing production, he said.

The good figures flatter what is a mixed picture. There has been less foreign funding for smaller and regional private banks in Eastern Europe and the CIS with maturities of more than one year and in early transition countries, said Putz. Eurozone banks are cautious in taking on risk outside their home market and in Russia trade finance is increasingly confined to large, state-owned banks, he said. Some of the most active players in the trade financing industry, especially in France and Italy, have substantially slowed activities in the region.

Regional and national development banks and export credit agencies are only starting to fill the void. Even so, markets are not in the same situation as in 2008-09 when there was a huge risk perception and trade financing costs ballooned to 500-600bps for a short period, said Auboin.

Today, low interest rates and improved liquidity has enabled transactions to take place at an all-in cost of some 100-250bp, he said.