UPDATE 2-Trade finance bankers hail dialogue with regulators

* Trade finance/regulator meeting informative, constructive

* Dialogue on unintended consequences of rules on trade

(Adds byline, details, background)

By Jonathan Lynn

GENEVA, Oct 14 (BestGrowthStock) – Providers of trade finance and
banking regulators have begun a dialogue on the unintended
consequences of new banking rules for the crucial funding, the
International Chamber of Commerce (ICC) said on Thursday.

The comments suggest that the Basel banking regulators will
review the impact of new proposals, known as Basel III, on trade
finance, the lifeblood of global commerce.

Practitioners of the traditional form of lending say it is
unfairly penalised by the new rules as it is much safer than
riskier financial asset classes targeted by the regulators.

At an unannounced meeting on Wednesday the Paris-based ICC,
which sets rules for trade finance, and the Asian Development
Bank (ADB) discussed the findings of a database on trade finance
defaults the two institutions have set up, that show a default
rate of only 0.02 percent, with the Basel Committee on Banking
Supervision. [ID:NLDE69C18D]

“Yesterday’s meeting with the Basel Secretariat was very
constructive and informative,” said Kah Chye Tan, chairman of
the ICC Banking Commission and head of global trade finance at
Standard Chartered (STAN.L: ).

“We believe this meeting represents the beginning of a
dialogue with the Basel Committee on a number of fronts in
relation to Basel III, including potential unintended
consequences on global trade,” Tan said in a statement.

The dialogue would also examine how to refine the collection
of data to demonstrate what was known intuitively: that trade
finance carries relatively low risk, he said.

The Basel Committee declined to comment on the meeting or
even confirm that it had taken place.

But in a statement mailed in response to a Reuters inquiry,
the Basel regulators said they had received formal comments from
the ICC on the impact of proposed new rules, adding: “… in the
case of trade finance, we are fully aware of the issues.”

Trade finance underpins 80-90 percent of the $12-13 trillion
in merchandise trade, using instruments, some of which date back
to the Middle Ages, that are short-term, secured on the cargoes,
and repaid automatically when the goods are delivered.

Banks and other finance houses make painstaking checks on
the identities of importers, exporters and shippers before
approving the credits, resulting in the low default rate.

The ICC-ADB database gathers data from nine leading banks
over five years, with 5.22 million transactions worth $2.5
trillion. In that period there were only 1,440 defaults.

The ICC said it now hoped to make that pilot project
permanent. It was set up to provide hard data that could be used
to demonstrate to regulators the anecdotal evidence that trade
finance is much safer than other forms of lending.

Trade finance instruments such as letters of credit are held
off banks’ balance sheets while they are being processed. The
could therefore fall foul of the Basel III rules designed to
deter banks from hiding toxic assets off-balance-sheet, one of
the causes of the financial crisis.

Heavier capital charges for such instruments would tie up
bank funds that could be used to support trade, hobbling the

Although trade is rebounding this year, restraints on trade
finance could hurt emerging economies and small businesses.

Bankers say even the existing rules, Basel II, impose an
unfair burden on trade finance, whose importance G20 leaders
underlined at their summit in London in April 2009 with a $250
billion package to revive the sector.
(Editing by Stephanie Nebehay and Philippa Fletcher)

UPDATE 2-Trade finance bankers hail dialogue with regulators